Wednesday, April 09, 2003

Oligopolies and Oligopsonies An oligopoly occurs when there are only a few sellers in the market. An oligopsony (it’s a technical term from economics) happens when are only a few buyers in the market. As oligopolies grow, so do oligopsonies. We’ve already mentioned a major oligopsony, the limited number of national book chains. Basically, the success or failure of any book depends on how it does at Borders, Barnes & Nobles, and Amazon. Other bookstores hardly matter. Needless to say, this puts those companies (that "buy books") in a very strong bargaining position in relation to book publishers. Those three can dictate terms and determine rates. The potato market works similarly. The biggest buyer of potatoes in the world (through middlemen) is McDonalds, followed by Burger King and Wendy’s. There are other buyers of course, but these three determine the overall demand, the type of potato wanted, the price they’ll be willing to pay, and the time of delivery. The rest of the market, is by comparison, small potatoes. Similarly all food manufacturers are increasingly being bossed around by an oligopsony of supermarkets. Whatever Wal-Mart, Kroger, Safeway and a few others demand, you’d better supply, whether it is fees, onsite help, co-op advertising. This set of expectations shows up the weakness of small producers, who don’t have the resources to meet these requirements, or to go toe-to-toe with the biggest chains. The best way to counter an oligopsony is with an oligopoly. Proctor and Gamble or Unilever can, to some extent, stand up against Wal-Mart or Walgreen’s. Smaller companies haven’t a chance. And by the same token, oligopsonies are formed to fight the power of oligopolies. Safeway can interact as a peer with Nestle or Kraft, while the local grocery market cannot. Most oligopsonies are in turn oligopolies. The big chains are oligopsonies with regard to the manufacturers, but oligopolies to the customers. The cable operators are becoming an oligopsony to the oligopoly of TV channel owners’ to their subscribers, they’re local monopolies. National radio chains like ClearChannel and Viacom operate the same way. Of course, not all industries are in the hands of two or three major players. But in almost every imaginable industry, there are fewer players than there were ten years ago. Industries that had 10 major players now have six, those that had six now have three leading firms. 8:57:48 PM    comment []

Oligopoly and the market In the ideal free-market economy of our politicians, every product has an equal chance to make it big. But in the real world, entrenched forces combat equal opportunity. The market in most sectors is not a democracy but an oligopoly. Even the Internet, which was supposed to "change all that" is in danger of becoming still another tool that mostly enhances the power of the oligopolies that rule major markets. In many developed market sectors, two or three players now command over 75% of the total market. Just as Coke, Pepsi, and Cadbury-Schweppes dominate soft drinks, so too so Budweiser, Miller, and Coors share the American beer market, while Nabisco, Keebler and Pepperidge Farms are the masters the cookie industry. (Typically enough, Sunshine Bakeries which used to be number three, was acquired by Keebler in 1996. Keebler in turn was acquired by Kellogg in 2000. Nabisco is a division of Kraft/Philip Morris and Pepperidge Farm is owned by relatively minor player Campbell.) This tendency toward oligopoly is accelerating, as fewer and fewer companies grapple to control the limited mind space. In the book industry, historically an arena of many small and mid-sized competitors , there are now far fewer major players, both on the production and distribution side. A few large conglomerates (Bertelsmann, The News Corporation, Viacom, and, until it recently pulled out of the book business, Time-Warner) publish most leading titles, and a few chains (Barnes & Nobles and Borders) dominate retail sales, along with online shopkeeper Amazon. This state of affairs has been brought about by a series of mergers, acquisitions, and bankruptcies over the past thirty years. In the same way, there are far fewer major recording studios than twenty years ago; fewer and fewer movie chains and movie studios. As for magazines, they are dominated by just a half dozen companies -- Conde Nast, Time-Warner, News Corporation, Hearst, Hachette Filipacchi and Bertelsmann. There are exceptions, true, but even in many relatively de-centralized businesses, such as hospitals, hotels or commercial printing, the trend to consolidation has unmistakable. For example, the funeral home industry used to be the quintessentially local, owner-operated business, but is now dominated by three large chains who quietly bought up many Catholic, Protestant, and Jewish funeral homes in various municipalities, so that, in many case, one of them has become the dominant player in many local markets. Commercial printing was likewise a highly fragmented market with many thousands of local family businesses, but consolidation over the past decade is gradually changing that picture as publicly held corporations buy them out or run them out of business. These national companies have the stature to get serious mind space among potential customers nationwide. 8:51:50 PM    comment []

© Copyright 2003 Steve Hannaford. Last update: 4/15/03; 7:33:44 PM.