Oligopoly IS Free Market Economies

As American schoolchildren, we are taught that in traditional free-market Capitalism, producers compete for consumers by making a better product at a lower cost. We are taught about the dangers of monopoly power, the pitfalls of Communism, and something or other about the success or failure of laissez-faire economics. We are taught that free-market Capitalism works the way it does because when a consumer is presented with a choice, he or she will behave according to a certain conception of rationality: consumers will purchase the most product available at the lowest price available.

But how do producers compete when costs are as low as possible? Or when prices are as low as the competition will allow? This latter question may seem strange: why extend to one’s competitor the power to price one’s own product? Because our globalizing, vertically-integrated economy is founded upon such a pricing scheme, which is the consequence of a market structure known as oligopoly.

Oligopoly means that a very few firms have extensive influence over groups of markets, a situation that results from decades of wide-spread acquisitions and mergers. Such an environment changes the nature of economic competition: two parent firms that that have competing subsidiaries in one market may require different subsidiaries to cooperate in another market. As John Malone put it in the Financial Times: “Nobody can really afford to get mad with their competitors” (May 28, 1996).

Consider Coca-Cola and Pepsi Cola. There are few differences between these two products: they are delivered in much the same way (bottles and cans), they contain many of the same ingredients (high fructose corn syrup, caramel color, water), and the difference in cost is negligible. Yet we say they are competitors. In what sense, then, do they compete, if not for access to consumers’ wallets?

In markets dominated by oligopolies, producers appeal not to consumers’ wallets, but rather to their hearts and minds; brand name identity is a vital part of this condition.

The brand is largely a symbolic entity, composed often of a material product, stylized packaging, and a marketing strategy that emphasizes novel features (frequently described as “revolutionary,” “advanced,” or “innovative,” although just as frequently such features represent relatively minor or obvious improvements over existing products).

Coca-Cola competes by creating marketing strategies that attempt to make its consumers feel better than consumers of competing brands. Often these marketing strategies rely on one subsidiary endorsing another to lend some aspect of one brand’s symbolic qualities to another.

When pictures of the Little Mermaid show up on soft drink cans, is this Disney endorsing Coca-Cola or is this Coca-Cola endorsing Disney? Really, it is neither and both; the question is like asking whether the hand endorses the mouth by eating.

Producers under oligopoly use marketing to compete for access to markets, and consumers are left to compete with eachother. Because vertically-integrated companies are able to control all aspects of a product, from design to production to distribution, oligopolies are able to leverage this ability to influence the behavior of consumers (by manipulating supply and demand). Because the economic value of a product is to a large extent determined by the perception of scarcity on the part of consumers, an oligopoly is able to charge whatever it wants for certain products by limiting the availability of that product. We see this every couple of years now when Sony releases a new version of the PlayStation: a limited supply coupled with successful marketing forces consumers to compete, while Sony, the producer, rakes in the profits.

The real danger of a globalizing oligopoly is that it makes brand identification akin to a form of nationalism, while the entities to which consumers pledge allegiance have no national allegiances themselves. Globalization, for all the well-deserved criticism maintained by the activist left, may be a natural and inevitable consequence of human evolution. At the same time, this neither means that the United States ought to be the monopolist of globalization, nor that the United States ought to sit by passively while multinational corporations subvert national boundaries and exploit poverty for the purposes of cheap labor. At the end of the day, the exploitation of the global labor force really benefits only a very few individuals, and consumers are left to finance their own subjugation.