Last week, Barack Obama unexpectedly issued an executive order directing US agencies to shakeup uncompetitive industries, tacitly confirming that the American economy has a problem with oligopoly power. Should we do the same in the UK?
Kraft Food Group, SABMiller, 99p stores, BetFair and O2. What do these companies have in common? They were all recently involved in corporate mergers or takeovers, or are set to be in the near future. Heinz’s merger with Kraft last year made it the fifth largest food company in the world, while AB InBev’s likely takeover of SABMiller means that a single company will soon supply a third of the world’s beer.
Many of us are familiar with the presence of oligopoly power in our economy. It is no secret that the energy, banking and supermarket sectors are dominated by a handful of very large firms. But the extent of this market concentration seems to be significantly underestimated. From telecoms and radio, through to IT services and accountancy, oligopolies have taken root in all corners of our economy.
According to an investigation by the Centre for Policy Studies, the top 5 companies own 89 percent of the market share in airlines, 99 percent in internet search engines, 80 percent in cinema screens, 90 percent in radio and 91 percent in the video games industry. While microbusinesses are on the increase, very large firms (with 500+ employees) account for 44 percent of total private sector turnover in our economy - a figure that looks set to grow.
We don’t need research studies to tell us this. Just look around you. The phone you call on, the food you eat, the cosmetics you apply, the bank you use, the furniture you sit on – chances are they were all made or sold by big firms operating in heavily concentrated markets.
Is this a problem? Hasn’t a global behemoth like Amazon done wonders to reduce consumer prices on everything from books to clothing to electrical items? Haven’t the major supermarkets driven down food prices in their battle to win over customers? Haven’t media titans given us the best quality entertainment we’ve had in years?
Advocates of oligopolies put forward a simple argument: the bigger that businesses are allowed to become, the greater the economies of scale that can be achieved. And it is only with economies of scale that companies can be efficient and cover the costs of research and development. This was the argument put forward in the late 1970s when antitrust laws were relaxed in the face of globalisation pressures.
There is some truth to this narrative. Energy generation, for the most part, can only be provided by utility behemoths with huge funds to cover the sunk costs involved. Yet the notion that oligopolies are always good for efficiency and innovation is unfounded. As our own research has shown, markets like education, health and information technology often function better with many small and nimble businesses.
At the turn of the Millennium, the Cruikshank Report made it clear that the concentrated nature of the banking sector had led to excessive prices for consumers. More recently, an Ofcom investigation of 25 countries found that average charges in telecoms markets with three competitors were 10-20 percent higher than those with four. Another study, this time from the US, found that in most cases the prices of firms rise after merger activity.
Yet we shouldn’t judge the merits of markets solely on what is best for consumers. Last year, it was reported that 1,400 suppliers to UK supermarkets were at risk of imminent collapse due to pressures from above. This is one instance among many of excessive ‘monopsony’ power, where large firms have excessive control over businesses in their supply chains. The ultimate result is less choice for consumers and more instability in markets.
Democracy is another loser. Oligopolistic firms often use their power to lobby for change in areas such as regulation, taxation and public sector contracting. Politicians are wooed and courted, and made to believe that mergers are inescapable and break-ups unthinkable. A report last year from Transparency International showed that the UK has the third biggest lobbying industry in the world.
All of which begs the question of what to do about it. I’ll leave the exploration of solutions for another blog post. But at the very least we need to have a much deeper conversation about the implications of heavily concentrated markets for our economy. To the big questions around entrepreneurship, the sharing economy and the future of work should be added another: how do we deal with oligopolies?
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