Oligopolies
workers were told about non-competes in their job offer, and in 70% of cases, they were asked to sign them after having taken up the offer and rejected alternatives (Tepper and Hearn, 2019). Evidently, workers, who are also consumers, are of little importance to many oligopolists which further demonstrates that high market concentration not only gives firms a high degree of monopoly power, for reasons aforementioned, but also allows oligopolists to control wage rates in the labour market, owing to their high degree of monopsony power. Conversely, in certain situations, leaving oligopolies to their own devices in the absence of regulation could even benefit consumers. Recently in the UK, a price war, triggered by Lidl and Aldi, caused many consumers to switch their expenditure from the four largest UK supermarkets – Tesco, Asda, Sainsbury’s and Morrisons – to the less expensive supermarkets, namely Lidl and Aldi. Firstly, an increase in price competition is likely to elevate consumer welfare as customers are able to save and spend more money elsewhere, and former Tesco CEO, Philip Clarke, actually stated, in response to the new competition, ‘the whole business will have sharper prices and better quality’ (Hoare, 2020). Consequently, consumers will also be able to enjoy higher quality products due to the rise in non-price competition alongside the falls in prices. Unfortunately, the major firms in the midst of a price war are not those suffering the most. As a matter of fact, as a result of the price war, small food suppliers and farmers are under the most pressure for a few reasons. First of all, smaller suppliers have a weaker market position therefore less bargaining power than large suppliers, and secondly, each of these large supermarkets could be their largest or sole source of revenue. According to EMW lawyers, suppliers with an annual turnover below £25 million experienced a fall in profit margins from 3.5% to 2.1%, in 2014. In contrast, in the same year, the largest food suppliers’ margins increased from 5.2% to 5.4% (Kollewe, 2015). Lately, consumers have been able to benefit from the UK’s supermarket price war for reasons discussed, while suppliers’ margins have been squeezed and supermarkets’ profits have temporarily taken a hit. However, it is important to consider that the six firms discussed hold close to an 80% market share in the supermarket industry, meaning that, without sufficient regulation, they could just as easily raise prices which could severely impact consumers. On May 15 th , 1911, John D. Rockefeller’s Standard Oil Company was divided into 34 companies under the Sherman Anti-trust Act. The oil industry was extremely highly concentrated during this period: Standard Oil controlled 90% of the oil sold in the United States, meaning it was not far off being a monopoly. Rockefeller flaunted his industry power frequently: whenever his competitors didn’t obey him, he simply undercut their prices in order to bankrupt them (Flynn, 2018). Once oligopolists are split up, as in the above instance, collusion with intent to fix prices and output is much harder because communication between a greater number of firms is difficult to maintain. Furthermore, firms are much more likely to unilaterally undercut their rivals when there are more of them because trusting a larger number of competitors – who all aim to maximize profits – to maintain prices is optimistic to say the least. Unlike the previous perhaps milder punishments discussed such as regulatory fines, forced de-mergers are rather draconian, but ultimately, they are effective. On the other hand, many firms claim that mergers will bring ridiculous cost savings which they will be able to share with customers just to appease regulators. In 2015, during a mergers and acquisitions boom, Deloitte calculated that firms filing M and A requests declared they would save about $1.9 trillion (Tepper and Hearn, 2019). While companies do save costs by synergizing, the savings are rarely passed onto consumers. In reality, once mergers and acquisitions are completed, prices tend to rise.
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