Today, only farmers, gardeners and fishermen operate in markets with perfect competition. All other markets are imperfect and must be described to a greater or lesser extent as oligopolies, duopolies or monopolies.
It cannot be otherwise, aircraft factories, power plants and cement factories must necessarily have a certain size in order to function technically and economically soundly.
An "oligopoly" market price will contain a larger percentage profit for the seller than farmers, gardeners and fishermen can achieve in their perfect competition markets.
There is no doubt that the imperfect conditions in oligopoly markets make it possible for the agents there to increase their prices in informal agreement under special circumstances and thereby create the type of inflation that is called "seller's inflation" or popularly "greedflation", as we experienced it in 2020-2023. We must also make us clear that these imperfect conditions still exist and will exist in the future. Therefore, we must expect that greedflation will occur periodically in the future.
1. Oligopoly
In 1776, the Scotsman Adam Smith described the free market in his work: "The Wealth of Nations".
A nation may have natural resources, such as fertile arable land, fish in the seas and fjords, minerals in the mountains, a pleasant climate and industrious, intelligent and honest inhabitants. It is the task of the economic system to transform the nation's resources into wealth in the form of useful products and services and healthy and nutritious food.
In Western countries, we have the economic system that we call the free market or capitalism, which has gradually emerged from history as a replacement for a historical system based on noble landowners and the old collectives, which were village communities and guilds, which controlled quality, quantities and prices.
In his book: "The Wealth of Nations" in 1776, Adam Smith described the free market, which we call capitalism: If only the market forces are allowed to develop freely, they will by themselves create the optimal and fair prices. Administrative price regulations are not necessary. You only have to leave everything to the free choice of the individual entrepreneurs and consumers, and the "invisible hand" of the market will automatically create prices that reflect the costs involved in the production of the products plus a fair profit for the entrepreneurs, for the good of society as a whole.
Supply and demand. Graph Resarch Gate.
Customers will generally only buy if the price is low, and entrepreneurs will only send goods to the market if they are rewarded with a reasonably high price. Thanks to these two opposing interests, an equilibrium will be established, namely the market price.
It is the beautiful economic model that we know so well. The increasing quantity supplied as a function of the increasing price, and the decreasing quantity demanded, also as a function of the increasing price. Where the two curves intersect, the market price is defined, which is represented by a horizontal dotted line on the vertical axis.
This is how we perceive the capitalist economic system, the "free market", which is so important for our political views.
However, this model only applies to "perfect competition". Which basically means that there are so many suppliers and potential buyers that they cannot individually influence the price.
The market for vegetables sold at the gardeners' sales association's events is a typical example of "perfect competition". The market for fish is also a good example.
Individual gardeners or fishermen can meet and talk about the bad times. They can drown their sorrows in a glass of beer or a cup of coffee, but they can't really do anything about it. Prices are firmly controlled by the anonymous market forces, Adam Smith's "invisible hand".
Family shops in the fifties.
Many of our parents and grandparents in the fifties and sixties had "their own".
There were farms down to 4 acres of land. Bottom-net fishermen, who had only a few dinghies. There were small local shops, surveyors, wholesalers and travelling salesmen everywhere. All kinds of manufacturing still took place in this country. There were many local furniture factories. They all participated in markets that were almost perfectly competitive, because the number of suppliers was large. For them, perfect competition was simply identical to the free market and closely linked to the idea of political freedom.
But that was in the good old days. The world has moved on. Most markets today are characterized by a few, very large, sellers.
A small handful of supermarket chains have replaced the small shops of the past. In the old days, you could send your children down to the local grocer and buy "on the book". Nowadays you take your car and drive to the nearest Netto, Bilka, Rema or Brugsen and buy your groceries.
Bottom-net fishermen in the fifties.
Flights are provided by SAS, Lufthansa, British Airways, Norwegian and so on. Cars are provided by Pequot, Mercedes, Toyota etc.
And when, and if, such huge organizations meet to talk about the bad times, they don't have to drown their sorrows. They are able to do something about it. Adam Smith's "invisible hand" has lost its power.
Oligopoly is a market form where the market is dominated by a few very large suppliers who know each other. A limited number of agents in a market define an oligopoly, even if the firms do not formally cooperate with each other.
Most modern markets are oligopolies. Coca Cola, Pepsi Cola, Schweppers and Red Bull dominate the soft drink market. Carlsberg, Heineken, Budweiser and a few others dominate the beer market. The Danish banking market is dominated by Danske Bank, Nordea and Jyske Bank, among others. Virtually every market for goods and services is now dominated by a handful of very large, often international, firms.
The economic concern is that an oligopoly can block new entrants of new agents, raise prices, and stifle innovation or direct it in ways that make customers increasingly dependent on a particular product, all of which harms competition and thus consumers.
The economic model with the smoothly decreasing demand curve and the smoothly increasing supply curve, where the intersection defines the market price, only applies to "perfect competition." Under the modern market form, "oligopoly," there is also a kind of market price, but it is somewhat more difficult to analyze.
2. The behaviour of oligopolistic companies
"Oligopolistic" sounds almost like a rare economic disease. But the word oligopoly comes from Greek and means "few sellers".
Markets with a few easily identifiable suppliers, who know each other, so to speak personally, are in fact a very old and widespread phenomenon. Throughout the Middle Ages, all merchants and master craftsmen were members of their respective guilds. The guilds set prices, monitored quality, and organized journeyman's test and master examinations. The members supported each other in all aspects of life. They represented their members to the king and the authorities.
It is easy to imagine that a master or business manager can develop a kind of understanding of his competitors in the same business area. After all, they must be faced with very similar problems as himself on a daily basis, with quality, technology, customers and employees. One can easily develop a feeling that you know the man. The next logical step would be that now that you know him, you can also trust him to keep an agreement.
A traditional "master craftsmen plot" describes quite well how an oligopolistic market can function.
In a provincial town, the municipal engineer puts out a public construction project to tender. The local master craftsmen meet in the lodge and decide whose turn it is to win. The chosen one submits a bid that gives him a comfortable profit. All his co-conspirators also submit bids, but they shoot far above his price.
The only way the municipal engineer can defend himself against a "master craftsmen plot" is by involving outside companies in the tender. Companies that do not know the local craftsmen personally and are eager to enter the market. They can be from a completely different city or, ultimately, from abroad.
Follow the leader. Drawing alive@work.
"Follow the leader" strategies are characteristic of oligopolies.
A market is dominated by a small handful of large national or international companies. One of these is the most cost-effective. This company acts first and sets the price. All the other market participants tacitly join in and set their prices in line with "the Leader". None of them want to engage in a price war with the most cost-effective company. This can only lead to bankruptcy and ruin.
The price thus set is therefore a market price in the sense that the goods are traded at the price. But it is still different from a traditional "perfectly competitive" market price, which consists of costs plus a reasonable "survival allowance" for the entrepreneur. An "oligopoly" market price will generally include a larger percentage profit for the seller.
In the struggle for survival in the economic jungle, it is a very big advantage to be big.
A large company, usually international, participating in an oligopoly will have significant economies of scale in both purchasing, production, distribution and marketing. It may well be the case that even if it has a relatively large percentage profit margin, its prices will still be far below what a traditional family business can survive on.
Economics of scale. Drawing Stupinoadm.ru.
Participants in an oligopoly are typically not very interested in overcoming their rivals completely and become a monopoly. Monopolies are constantly in the searchlight of the government authorities and can be exposed to all sorts of interventions and regulations. Customers don't like them and are accusing them to charge overprice and to be sloppy with quality. Microsoft is a frightening example. It is far more beneficial to remain as an oligopoly in a longstanding friendly competition with other large firms in this market and enjoy the nice profit, which the market participants informally have agreed to take.
Typically, oligopolistic firms do not want to lower their prices, even though they may experience declining sales volumes for one of their products. They prefer to increase the value of the product by giving it new features.
However, if they are confident that their market share will not be harmed, they will raise prices, provided they have reason to expect that other firms in their market will do the same.
In oligopoly markets, there often is a significant element of cooperation.
Again and again, it is seen, that a deputy manager from the dominant firm will be hired as top manager for the nearest competitor. He will often be preferred for the company's own homegrown candidate. Maybe he felt ignored in connection with the occupation of an even higher position in the dominant firm. In many industries, corporate executives change very often, maybe every three or four years. Inevitably they establish a network of acquaintances in the industry, former colleagues, former classmates, friends from meetings and seminars in professional associations and so on.
If a technician, employed by one of the oligopolistic firms, applies for a job at one of the other companies in the market, it is most likely normal for the responsible manager to make a discreet and private telephone inquiry at his acquaintances in the other company.
Since it is more or less the same people, who are in charge in all the companies in the market, one will find, that the corporate culture, organization and working methods are quite similar. It is no longer said: "We have always done it in this way here in the company.". Now it sounds more like: "This is how we did in my earlier, more successful company."
Yes, even the products are now more and more alike. Earlier one could on a long distance distinguish one automobile brand from another, now we often have to go close and look at the label on the front. Today, most brands of beer taste more or less alike. It will rarely be possible to distinguish the taste of one brand of beer from another if you drink them blindfolded.
Harvey Firestone, Henry Ford, Thomas Edison and Burrows
Personal friendship between the owners of the firms associated with the same industry may also be the basis for cooperation. A famous example is the longstanding friendship and cooperation between the owners of Ford Motors and Firestone Deck in the U.S.
Henry Ford and Harvey Firestone both were sons of farmers and both had mechanical skills. Firestone Tire and Rubber Company supplied the tires for the famous Ford T model. Henry and Harvey got sympathy for each other and became friends. They often went on camping and fishing trips together. One can imagine, that they made important business decisions while sitting in the boat waiting for bid. Just like many important decisions today are said to be made on the golf course.
Oligopolistic firms want to expand. It is said, that they can expand horizontally or vertically.
Expanding horizontally means taking over other companies in the same industry. This is the process that we hear about in the news every week, that now this and that famous company has bought one of its smaller competitors. Danske Bank takes over BG Bank, Lufthansa buys Swiss Air, Aventis takes over Hoechst, Adidas takes over Reebok, Royal Unibrew buys Albani, Grundfoss buys the Italian Tesla, Vattenfallet buys Fynsværket, DSV buys DB Schenker and so the development continues every week.
Henry Ford on a fishing trip with Harvey Firestone, Christian, and Thomas Edison. Photo Library of Congress
However, there are also spin-offs, where large companies separate one of their business areas as an independent company, such as Novo Nordisk separated NNIT, Siemens separated Osram, Maersk separated Schwitzer and Aker Solutions separated Aker Carbon Capture and Aker Horizons. However, there are far more acquisitions than there are spin-offs.
To expand vertically means, that a company increases control of its subcontractors and suppliers, and on the sales-side, of its distribution channels.
Starbuck tries to gain more control over its raw material supplies by buying coffee beans directly from coffee growers in Kenya or Ethiopia and thereby bypassing coffee brokers. HBO is seeking more control of purchasing by producing its own series, like "Rome," "Sopranos," "Game of Thrones" and "Deadwood" instead of buying films from film studios. On the sales side, B&O and Pandora are seeking to gain more control over their distribution channels by establishing their own networks of stores.
A trend among oligopolists has been to focus on their core areas.
For example, Pepsi Cola sold its shares in Taco and Kentucky Fried Chicken to concentrate on its core business, which means the well-known soft drink. Apparently, many think, that the competition in the oligopolistic markets most likely will end up, that in the world there will be from two to perhaps five large international companies left in each business area. If a company wants to be among them, it must concentrate on, what they are good at, which is its core business.
Relationship marketing. Photo shoes-web
Not so long ago, the concept of "relationship marketing" entered the world. It will give Adam Smith's "invisible hand" even more serious muscular dystrophy. According to this strategy, the company must seek long-term and stable relationships with customers and suppliers. Something like the famous relationship between Ford Motors and Firestone. This can save a lot of money in purchasing and sales departments, it is said. The good old procurement procedure to obtain three to four offers and then selects the best one, that will soon be history. Quality control and inspectors will not be necessary anymore. Bad debtors will be history.
"Relation marketing" will really mean, that the oligopolistic firms in the future will make business only with other oligopolistic firms in other business areas. For example, the contractor company Skanska will buy mineral wool from their chosen supplier Rockwool only. They will constitute an impenetrable network, that it will be very difficult for new firms to find a foothold in.
As mentioned above oligopoly involves a fairly large element of collaboration with other companies and organizations, not to underestimate governments. Leaders of the oligopolistic firms must be trustable personality types, who are able to forge friendships with business partners. They must have something of the same characteristics as politicians.
The worst thing, oligopolists know, is that a newcomber will seek to get a foothold in their market in order to gain a share of the profit. This causes price competition, lost profits and lost market share if they fail to refuse the intruder. It is possible to enter an oligopolistic market, but it requires a very large marketing budget.
In this sense, they will get a challenge in the future. Indians and especially Chinese companies are tired of being the place, where everything can be produced cheaply, while the international brand owners sell the same product expensive in the West and carry away most of the profits.
For example, a shirt, which can be manufactured in a suburb of Guangzhou for, let's say, 1.5$, to be on the safe side. The same shirt can be sold in the West as a famous brand for, let's say, 8 to 10$. The profits of globalization are of this magnitude. This are the kinds of profits, which, especially the Chinese want to have part of. They are one of the main sources of the big international companies current Bonanza.
In the official opening speeches at exhibitions and fashion festivals in China, it is openly declared, that their goal is to create their own Chinese brands in all commercial areas. In the business broadcastings of the Chinese television channels are brought interviews with well-known American professors, who give advice on how to establish own brands.
Already the Chinese laptop "Lenovo" sells as number three on the world market. The Chinese washing machine manufacturer, Haier, have already established a factory in the United States.
There can no doubt, that within 10 to 15 years Chinese brands will be present in all markets. They will offer the same as the existing oligopolists, only cheaper. It will be a difficult time for the, now so cocky, international companies.
Large office landscape. Photo rbc
Large international companies are often huge organizations with tens of thousands of employees, organized into a maze of special functions, planning, logistics, technical support, etc. The connection between the efforts of the individual specialized employee, the market and the company's ability to achieve its goals can be quite confusing. Therefore, it can be very difficult to judge how much a specific employee's efforts and decisions contribute to the organization's profits in the long term.
For numerous departments such as technical support, development, customer support, human resources, and so on, and for whole business areas, it is often not possible to describe the size of activity with one parameter. Therefore, it can be extremely difficult to find out how much they contribute, and if their activty is useful, and if output from their department is in the right proportion to their costs. Often one gets the impression that they simply use the money, they have available. Only a very small amount trickles down to shareholders in the form of dividends.
3. Greedflation
Inflation is a big topic in economic theory. There are cost-push inflation, demand-pull inflation, and inflation due to an increase in the money supply and the resulting decrease in the value of money.
Dr. Isabella Weber from the University of Massachusetts Amherst has put forward a new theory about the causes of the inflation that has ravaged the US and Europe since the Covid outbreak.
She calls it "seller's inflation", but it is popularly called "greedflation". The theory, in its simplicity, is that sellers, the companies in oligopolistic markets, raised prices simply because they can.
In 2020, the pandemic disrupted many global supply chains, including shipping and land transportation, which caused an initial "natural" cost-push inflation. One would expect these impacts to disappear in the second half of 2021 and into 2022, as conditions normalized, which did not happen, on the contrary, inflation worsened.
Inflation in Denmark 2022, 2023 and 2024. Statistics Denmark.
Isabella Weber explains this by saying that companies in oligopolistic markets simply took the opportunity to raise their prices beyond the cost-push effect they experienced in 2020.
Popularly, we can imagine the company's top manager shouting to those responsible for marketing: "You're probably aware that we have inflation! You better raise those prices now, that opportunity will not come again for many years to come."
But according to our theories of the free market, this should not be possible. There should be new firms on the sidelines ready to jump in and offer the same product, only cheaper. This did not happen because the agents in the oligopolistic markets are far too well established. They have experience and economies of scale that upstarts cannot match.
In fact, it is not a new problem that manufacturers and sellers cause price increases by taking high profits. As early as 1776, Adam Smith wrote in "The Wealth of Nations": "Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."
Smith argues that if every company in a supply chain were to raise their prices by 5% to increase profits, it would work like a compound interest rate and the effect on final prices would be dramatic. "In reality, high profits have a much greater tendency to raise the price of products than high wages," he said.
In investment theory, companies are said to have a narrow or wide moat. Companies with a wide moat are well protected against influences from the outside world, competitors, and the like. They have "pricing power," which means that they are able to pass on increased costs to their customers at any time. They can do this because their product is unique and cannot be easily replaced by other companies' products. For example, the American companies Microsoft and Salesforce are believed to have a very wide moat.
4. Duopoly and monopoly
In economic theory, a distinction is made between the market forms oligopoly, duopoly and monopoly.
From the point of view of society, the economic disadvantage of oligopolies is that they can block access to the market for new agents and they are assumed to slow down innovation and increase prices, all of which are detrimental to consumers.
A duopoly is an oligopolistic market with only two participants. The disadvantages of duopolies and monopolies from the point of view of society are the same as the disadvantages of oligopolies, only greater.
Typical duopolies are Boeing and Airbus in the global market for passenger aircraft, Apple and Samsung dominate the smartphone market, and Visa and Mastercard operate in the credit card market.
Microsoft is often considered to have a monopoly in computer operating systems, although they have some competition from macOS.
5. The case of Standard Oil
Oligopolies have been in the spotlight of the authorities for many years. They have been suspected of cooperating under the table to the detriment of consumers. Large companies that cooperate in oligopolistic markets are called "trusts" in the United States and "cartels" in Europe.
The case of Standard Oil is interesting because the dissolution of this company by law represents a possible sanction from society against companies that operate in markets characterized as oligopolies, duopolies or monopolies.
Standard Oil Refinery No. 1 in Cleveland, Ohio in 1889. Photo Wikipedia.
The American Standard Oil Company was founded in 1863, by Rockefeller, Maurice B. Clark and Samuel Andrews in Cleveland, Ohio. By 1870, the company operated the largest refineries in Cleveland. By eliminating competitors, merging with other companies and receiving favorable volume discounts for rail transportation of oil, Standard Oil had gained control of the refining of 90 to 95% of all oil produced in the United States by 1880.
In 1906, the US government filed suit against the Standard Oil Company under the Sherman Antitrust Act of 1890. The charge was that the company had undoubtedly misused its monopoly to abuse control of pipelines, obtain unfair volume discounts for rail transportation and used unfair methods of competition in the sale of refined petroleum products.
In the words of the court: "The evidence is, in fact, absolutely conclusive that the Standard Oil Co. charges altogether excessive prices where it meets no competition, and particularly where there is little likelihood of competitors entering the field, and that, on the other hand, where competition is active, it frequently cuts prices to a point which leaves even the Standard little or no profit, and which more often leaves no profit to the competitor, whose costs are ordinarily somewhat higher."
In 1911, the company was ordered by court order to break up itself into 33 smaller companies. Two of these companies became Exxon and Mobil, which later merged to form ExxonMobil.
6. The market for investment goods
There is a huge advantage to being big. Nowhere is this more evident than in the market for investment goods, especially the stock market.
There are two types of agents in the stock market.
Large investors can influence share prices.
The first type is a large number of private individuals, retail investors, who try to generate a return on their modest savings to prevent them from being eroded by inflation. Individually, they cannot influence prices, they can only try to predict which direction prices will go and dispose accordingly. For them, the stock market is a perfect competition market.
The second type is the large investors, banks and large funds and the like. They usually have better information. They manage millions and billions. For them, the market is an oligopoly. When they decide to take an interest in a particular share, although not too large, it will affect the share price. They can get the price of a selected stock to rise or fall by buying or selling, thereby manipulating retail investors.
Market makers buy up a stock, discreetly, patiently and over a long period of time at a low price. At some point, the stock is mentioned positively in investment magazines, a financial report is better than expected or representatives of the company in question speak positively about the future. Momentum investors flock in, and the price of the stock rises. Market makers sell at the higher price, cautiously, so as not to disrupt the price increase, occasionally they also buy to stabilize the price. When they have sold out, the stock falls again and retail investors try to escape. Own work.
The stock market is a "zero game". What some win, others lose. If the big investors have nice profits, there are others, probably some small investors, who have losses.
