Anyone who has studied Economics 101 will have been introduced to the problem of monopoly, how monopolists’ power can be constrained and the benefits of allowing ‘natural monopolies’ to continue to exist under state regulation. Indeed, most of us will have an intuitive grasp of why, for a specific market for a product or service, it may not be in the best interests of the consumer if that market is dominated by a single company.
However, in the UK many markets are dominated not by one company but by a small number of firms; this is called an oligopoly. Their practices may be nearly as serious a problem as an actual monopoly company in that sector. The existence of so many oligopolies has received little attention as a general problem, with each issue of oligopoly being treated as if it was sector specific. Unfortunately, the problem can be seen as a key characteristic of the whole UK economy.
There are a number of market sectors that might be easily characterised as oligopolies. For many of us the most obvious are UK supermarkets. In December 2022, Tesco accounted for 27.5% of the market, while Sainsbury’s accounted for 15.5%, Asda at 14% and Morrisons at 9.1%.
So, the big four accounted for around two thirds of all supermarket sales that month. Once the discounters Aldi (9.1%) and Lidl (7.2%) are counted in, six major supermarkets account for nearly 85% of the sector. This has often been presented as less of a problem that in other sectors because of active price competition among the large supermarkets and the discounters.
However, while up-scale and specialist food shops have survived in the UK, local fresh food retail has largely disappeared from areas which have one or more supermarkets, other than at farmers’ markets. Similarly, while seeming to present sometimes massive choice, only goods as can be produced to scale are now available, again reducing choice of goods for consumers as well as making it more difficult for new suppliers to gain a foothold and grow. As we know from Dragons Den, the ability to access the buyers of the major supermarkets is a key challenge for any small consumer goods business.
This is largely due to the associated problem of oligopsony, where a small number of buyers can dictate terms and conditions to producers who have few alternative supply chains to work with.
In response, UK farmers recently became more publicly critical of supermarkets’ long-term fixed-price contracts. Their contracts transfer the risk of rising input prices to farmers and away from the supermarkets. Due to inflation across their inputs, from energy to fertiliser, farmers are now switching to different crops but also to local, smaller scale models of business less reliant on supermarket contracts. These moves have already had an impact on supermarket consumers as the supply of fresh food has become at times erratic.
Other than supermarkets, one of the most noted of oligopolies is what is sometimes referred to as the Big Four auditing and accounting firms operating in the UK. The Big Four, PWC, Deloitte, Ernst & Young and KPMG dominate the market, and have been accused of using their domination to maintain high prices while offering unreliable services.
In a more consumer facing market, the provision of broadband to households in the UK is also dominated by four major providers (BT, Virgin Media, Sky and Talk Talk) with (again) widespread complaints of high prices and less than satisfactory service. Other highly concentrated or oligopolistic sectors include petrol forecourts, energy supply, coffee shops and book retail, to name just a few.
The market power of oligopolies
So, oligopolies are pretty common. We might also conclude that so long as they provide the services and products we want, a small number of dominant firms in any specific market area may not matter. However, not everyone is so sanguine about oligopolies.
Political economist Brett Christophers has criticised the UK, referring to it as a ‘treasure island’ for international business, and this is much to do with the ease with which large firms can engineer a joint oligopolistic domination of a market segment in this country.
By doing so, they can extract a surplus profit (in economic jargon a ‘rent’), which is the amount of profit they would not make if competition was more forceful. When critics refer to the UK as a system of rentier capitalism they are usually focussed on the role of financial services in UK economic policy making and the prioritisation of investment income. The surplus profits, and other commercial benefits, generated by less competitive oligopolistic markets are part of this picture too.
The key aspect of an oligopolistic market is the ability of firms to shape the market to their advantage, usually resulting in less price competition.
Another common feature is raising barriers to entry, making it hard for new companies to start new ventures in that sector. Participants may also actively shape the expectations of the market in their favour, so that things the oligopolists are unable or unwilling to supply are seen as either impossible or unwanted by consumers.
A report for the European Commission pointed out that there can be a fair amount of tacit collusion between firms in an oligopoly. There may be an understanding about the quantities of specific goods that should be produced, alongside a shared understanding about how much capacity each firm builds into its operations. What is regarded as a sensible research and development strategy will be shaped by the sector’s norms, and as we have already seen the market itself may well be distorted upstream by the oligopolistic firms limiting the choice of buyer in the market(s) to supply them.
Generally, then, where the dominant firms in a market sector agree on how their products or services should be supplied, shared norms emerge. This may be the result of norm building exercises via trade associations, but also more informally through the circulation of managers through the various firms as they build their career in the sector.
Only very senior managers are likely to have to take ‘gardening leave’ in between appointments to rival firms. Lower level staff circulate between the firms, carrying and enacting normative assumptions in their new job, while also being progressively inculcated into the shared understandings of the sector.
Are oligopolies a problem or not?
We need to look at the market segment and ask what the effects of this concentration of market power is, and what impact this has on consumers.
We might want to look at the profits made by the main companies in the market, the oligopolists. The Office of National Statistics has an implied, relatively stable benchmark of a normal profit for a UK firm of around 10%. Anything above that might indicate excess profits which could stem from an oligopolistic market.
Both Tesco and Sainsburys make around 7.5% gross profit, with an operating margin of less that 4% suggesting that the financial advantages of the oligopoly, at least, are not significant, even if the social costs or reduced choice may be an issue.
While it is difficult to disaggregate figures for broadband businesses, Talk Talk made a loss last year, leaving itself vulnerable to takeover, and Sky Broadband is sheltered within its larger parent. The energy companies are currently making major profits, but its difficult to assess the profits for the oligopoly that is petrol retail in the UK.
Alternatively, we can assess oligopolies by the social costs of martlet domination by a few large firms. The supermarkets have shaped the food and associated retail sectors to their own advantage, reducing independent retail in the areas/sectors in which they operate.
Unlike in France and Italy non-supermarket fresh food retail is a relative rarity in the UK. The provision of fast high-quality full-fibre broadband lags many other countries, even as we suffer from uneven and ineffective service from the main players, as the consumer pages in the media constantly remind us.
UK regulators seem to have taken a tightly focussed view of the costs of oligopoly, seeing it only a problem where excessive profits are evident. However, for most of us, each day we confront socio-economic limitations and distortions caused by the domination of so many markets by small numbers of companies.
Only when a wider view of the negative impact of oligopolies is put at the centre of regulation will we be rid of the sorts of problems we have recently experienced in the provision of fresh food through supermarkets or in our less than world-class broadband.