Oligopolies – and your wallet

The term “oligopoly” used to be a negative term to most people, just as “competition” had a positive connotation. Oligopolies occupy the middle ground between monopoly and the idealized world in which numerous firms compete.

An oligopoly is an industry in which a few firms dominate and exercise considerable stroke over consumers and suppliers. The goal of making those firms as profitable as possible is not served by facing off in never-ending cutthroat competition.

But what’s best for companies is not necessarily good for consumers. In an era of rampant consolidation, intelligent regulation is needed to promote competition.

Businesses work hard to insulate themselves from the “invisible hand” of the free market. The few firms in an oligopolistic industry are in the enviable position of setting prices, whether through collusion or silent agreement. The tendency is to cooperate with each other to minimize rivalry so as to maintain a common front against buyers and sellers, and create market power in certain geographic markets, or among particular consumer groups or product lines, which can lead to higher consumer prices and inferior service.

From the consumer’s perspective, oligopolies aren’t much different than a monopoly, where one firm has a stranglehold on a product or service for which there is no alternative. Moreover, oligopolies usually throw their weight around by exerting pricing power over suppliers.

There are oligopolies throughout the global marketplace, and concentration and consolidation appear to be increasing in U.S. industries from cable television, pharmaceuticals and airlines to banking and health insurers. As they concentrate further, profitability increases and consumers are disadvantaged. Left unregulated, these firms have enormous power to strategically restructure their industries and impose very high prices on consumers.

The airline industry is a prime example of an oligopoly, with 80 percent of all domestic passenger travel dominated by just four carriers. A wave of consolidation has been sweeping the U.S. airline industry: American Airlines merged with US Airways, United merged with Continental and Delta with  Northwest. Southwest acquired AirTran.

Consumers appear to be paying the price for this consolidation with fares and fees rising faster than inflation, and one or two airlines dominating particular markets. On June 30, the Justice Department announced it is investigating whether U.S. airlines have worked together to keep airfares high by limiting the number of flights and seats.

Another example is the banking industry. Despite reforms in the wake of the “Too Big to Fail” public bailouts, the five biggest U.S. banks now control nearly half the industry’s $15 trillion in assets. In 1991 the five largest banks controlled just 10 percent of industry assets. The concentration suggests that banking is not a competitive industry and it allows banks to jack up fees.

Health insurance is the most recent example. Over the last several weeks, Anthem reached an agreement to purchase Cigna and Aetna agreed to buy Humana. These two proposed deals reduce the number of for-profit health insurers to three.

But the bottom line is that these waves of consolidation hurt consumers by reducing competition. To change that, the “visible hand” of intelligent regulation needs to operate along with the invisible hand of market forces to promote competition and protect consumers.

Originally Published: August 15, 2015