The regulation of oligopolies
Jack Nunn
Since 1980, market concentration in the majority of industries has increased due to a rise in mergers and acquisitions across the globe, according to the Herfindahl-Hirschman Index, 1 and the proportion of new firms as a percentage of the total number of firms in the US economy has approximately halved in the past four decades (Tepper and Hearn, 2019). As a result, wage growth has stagnated as oligopolists’ degree of monopsony power in the labour markets has risen, both horizontal and vertical integration of businesses have created higher barriers to entry for new firms, and the exploitation of strategic barriers such as predatory pricing – designed to deter new entrants – has led to a fall in competition in numerous industries. Stakeholder theory would suggest that firms should act ethically so that stakeholders such as consumers and employees can profit alongside shareholders. Analysis through game theory, however, using the Bertrand and Cournot competition models suggests that firms could instead choose to manipulate prices and output in order to maximize profits by colluding and price fixing. Many large firms in oligopoly, contrary to the traditional theory of the firm, are also prepared to sacrifice profits in the short run by lowering prices in order to inflict losses on new firms with the intention of maintaining a dominant market position in the long run. In Australia’s highly concentrated banking sector, four banks, specifically ANZ, Commonwealth Bank of Australia, Westpac and National Australia Bank control more than 75% of the domestic market. Rod Sims, chairman of the Australian Competition and Consume r Commission (ACCC) claimed, ‘more competition was needed to protect consumers’ (Smyth, 2019). These four banks’ market power has led them to take advantage of customers. In 2017, ANZ and National Australia Bank were fined $100 million for rigging Australi a’s benchmark interest rate (Smyth, 2018). In oligopolistic industries where few firms exist, it is a lot easier for firms to communicate and cooperate in order to manipulate markets to their advantage as shown in the above example. This was further proven in 2018 by an ACCC report showing that large banks ripped off their customers by charging extra fees for no service whilst simultaneously giving poor advice to customers. The banking oligopoly in Australia is not the only one that takes advantage of its high degree of monopoly power: in 2018, US bankWells Fargo were fined $1 billion over mortgage and auto-loan violations that resulted in customers paying extra fees (Gray and Jopson, 2018). It is clear that in many highly concentrated industries, powerful firms displaying cartel- like behaviour are exploiting their customers’ lack of choice in order to benefit themselves at the cost of consumers.
Firm 1 – Row player, Firm 2 – Column player
High output
Low output
High output
$8 million, $8 million
$14 million, $6 million
Low output
$6 million, $14 million
$12 million, $12 million
*All figures represent the revenue of each firm
1 The Herfindahl-Hirschman Index, or HHI, is a measure of the market concentration in a particular industry. It is calculated by squaring the market share of each firm and then summing each individual result. The index ranges from 1-10,000 where 1 is a highly competitive market and 10,000 is a monopoly.
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