Oligopoly or a Free Market – A Realistic Choice?

The study of economics should be clearly divided into its factual, quantifiable aspects (more commonly referred to as “econometrics”) distinct from the more philosophical and abstract study (generally known as ‘normative economics’). This is becoming increasingly important as the world has become ever more interdependent. The global financial crisis attests to this.

The argument in the United States increasingly rages between “free market” advocates, such as Friedrich von Hayek and Milton Friedman, and advocates of governmental social planning from Horace Mann to Barack Obama.

Vocal anarcho-capitalists would ideally do away with all forms of governmental influence or control, preferring a reliance on the sovereignty and sanctity of an individual’s decision-making ability. Ardent social planners would prefer to regulate everything from “Joe Six-Pack’s” beer consumption to private sex.

Few “free market” adherents attach economic importance to the desired social, racial or sexist equality that a majority of Americans espoused over the past fifty decades. These issues are perceived more in the realm of sociology or political science rather than economics. When the issues are addressed, it is often felt that the “free market” theory would solve them, just as Adam Smith and his “invisible hand” led the way to theoretical capitalistic freedom.

Unfortunately, the “free market” theory in the United States certainly did not, by itself, do away with the social injustices of segregation or discrimination, poverty or the exploitation of labor that plagued the country. It ultimately took government planners to lead society in what a majority of the country’s citizens considered proper.

Was a conscious exception made for state intervention on these issues to promote increased control for economic purposes?

Even more perplexing is the apparent lack of discussion of oligopolies in “free market” discourses.

Significantly more measurable than the normative verbiage about the“free market,” economists have achieved a number of factual measures to determine when an oligopoly exists. The “four firm concentration ratio,” the Herfindahl Index or other closely allied measures can show with little dispute than an oligopoly structure exists. Most economists agree that four or five companies controlling more than forty percent of an industry’s market share indicates an oligopoly market.

While collusion, pricing fixing or cartels have been illegal in the United States for a century or more, economists agree that “price leadership” in an oligopolistic structure is inevitable, as are upwardly rising prices an downwardly “sticky prices” despite a free market.

Oligopolistic firms are not generally controlled in the United States, unless there is clear evidence regarding collusion or other gross legal violations, such as safety laws.

Through most of last century, oligopolies maintained roughly forty percent of GNP. Through government deregulation during the early part of the nineteen eighties, however, oligopolies dropped to a mere eighteen percent.

However, there are few consumer goods that are not directly controlled by oligopolies. From airlines to automobiles to soft drinks, movie studios to fossil fuel energy and distribution, government action for deregulation helped, rather than hindered, oligopoly in the country. Sheer financial size dictate the difficulty of market entry.

Individuals and private companies, not government, foster the never-ending race to maximize profit margins, to outsource and downsize employee labor in favor of more efficient technologies, or to move physical manufacturing to less expensive nations.

The most competitive industries, however, such as apparel, furniture and – yes, the mortgage business – are those that most failed in the market..

Norman Jewison’s 1975 science fiction film “Rollerball” (and the panned 2002 remake) envisioned a world not run by politicians, but corporations. Only a handful of companies control the industries responsible for communications, energy, food, medicine, sports and so forth. Despite its violence, the film tries to point to the power of the individual versus either a state or a corporation.

If we accept today’ realistic global trends, oligopoly is likely to win over both: the concept of state monopolies or a stateless “free market” of some nine billion people.  Already American, European and Asian firms dominate their industries and compete within the structure of oligopolies irrespective of national political borders or mores. Their outlook on people’s wants is similar to Roman emphasis on bread and circuses.

Ideally, a fundamental change in the nature of mankind would solve the many pressing physical problems facing the globe. That, however, seems totally unrealistic.

Much of economics recognizes the facts of proven theories, instead of clinging to outdated, normative ones. It changes as the times change, albeit very slowly.

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5 comments to Oligopoly or a Free Market – A Realistic Choice?

  • pb2c

    Note: i’m not for a totally deregulated market.

    The problem most people disregard when criticizing free market is the fact that the markets are not really free. This is a simple fact to observe from several perspectives.

    One easy to understand is patents, and i’m just going to touch this little detail here..

    Patents do not derive from a free market, they are, in effect, part of government intervention. And these practically sanction monopolies and oligopolies. There’s no other way of looking at them, it’s in their very definition.

    For this short comment, it doesn’t really matter weather we abolish it altogether, or reduce the patent’s term (something human like 5 years).
    What really matters right now is for people to acknowledge that problem.
    20 years is ridiculous, considering that all of us use previous knowledge on any of our findings/ inventions/innovations.

    “Creativity and innovation always builds on the past.”
    Lawrence Lessig – http://www.oreillynet.com/pub/a/policy/2002/08/15/lessig.html

    BTW, Adam Smith hated big companies and i don’t think he’d ever approve patents of any kind.

  • pb2c

    To expand a bit on my comment, i’d just like to say that people usually attack the so called free market for all the wrong reasons, and never for the right ones.

    But i liked your post, don’t get me wrong.

  • Interesting comment regarding patents.

    Would your same thinking hold for copyrights, especially in the face of self-publishing and greatly eased distribution, including electronically?

  • pb2c

    “In most of the world, the default length of copyright is the life of the author plus either 50 or 70 years. ”

    If that’s true, i think it’s a problem indeed, though not the same problem.
    IP means almost nothing to me, it’s too big of an umbrella. One thing is copyrights, another patents.

    There was a blog post recently where the author reasons,
    “If the current US Copyright Law had been in effect over Shakespeare, I think he could have been sued by many authors for copyright infringement for writing that masterpiece.”
    (referring to King Lear)

    I just lost a long post because i forgot to put my email address. I lost my thoughts, but i leave my links i guess.

    For anyone open minded, i would suggest watching this from Lessig:
    ” No one can do to the Disney Corporation what Walt Disney did to the Brothers Grimm.”

  • la martina polo

    I couldn’t agree more.Really expanded on this topic of less diversification and more up-front work in finding the right picks through very thorough analysis in search of good value.

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