The Structure and Consequences of Oligopoly

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The Organization of Petroleum Exporting Countries (OPEC) has been successful in controlling the price in the market. It is the perfect example of a cartel, a group of competing companies that agree among themselves about setting prices and production. The actions of these companies have significantly affected the world market. A rise in prices for oil can cause inflation. Low supply of oil in a country can cause unfavorable economic and political consequences like social unrest.

OPEC has control over the world petroleum market by adding a tax for international petroleum companies. Collusion then happened, where the competing companies agree among themselves to set their own “posted prices”. The governments are included in the agreement provided that they get a share of crude output, so the governments can also sell oil at their preferred price (Mikesell 24). The United States has been stock-piling oil in its inventories to protect the country from future crisis. What happened to the anti-trust laws? The OPEC is so powerful that the governments cannot do anything but to let it be.

Why do companies tend to merge and form a collusion? When they act like a monopoly, they have a bigger market power. When they have a bigger marker power, they earn more money (Stigler 45). The consumers have no choice but to buy their “necessities” from this group of big companies.

Even without collusion, if the dominant firms are the only visible ones in the oligopolistic market, the consumers have no choice but to stick with them. In these situations, the competition is not as strong anymore. The quality of output is not as good since they have already acquired and trapped the consumers. Let us take the telecommunication industry as an example. Although Smart has been the leading company in this sector, there are still many Globe telecom subscribers. And lately, many people have been complaining about the service quality of Globe Telecom. It has been declining and a proper measure to improve it quickly has not been achieved. Globe users cannot easily switch to Smart when most of their contacts are most probably Globe users as well. And it is not always guaranteed that they will get a better service from a different network. Thus, it is will cost the consumers more if they transfer to another network.

In an oligopolistic type of market structure, companies compete to take their competitors out of the scene. Armando Armas calls it “trilateral monopoly”, which is a “Winner-Take-All-Market”. He states that it is the reward and glory of the companies to be the “winners” in the market. The Philippine Dealing System Holdings, his example of trilateral monopoly, used its power to increase fees and charges for consumers, and it built thicker barriers to entry (Armas 102). The same goes for SM. SM supermalls has been monopolizing the market by buying properties and businesses from competitors. What is happening is SM buys the smaller industry players to expand and to increase their dominance. There had been an issue about SM wanting to buy a big share from the Ortigas Holdings. This includes the Greenhills Shopping Complex, which already houses big retail stores owned by SM like Ace Hardware and Toy Kingdom (ABS-CBN News). SM also bought a three-hectare land owned by Lucio Tan to expand their commercial business (Dumlao). Although these establishments offer a better lifestyle, they are not doing good because it takes away the chance for people to start their own business. Their main goal for business expansion is not to help people, but to accumulate more wealth. Because of that, even the once well-known companies like Uniwide and Ever Gotesco are no longer major players (Abrina). It is then harder for smaller businesses to compete. Aspiring entrepreneurs may not be able to enter the market because of these dominating companies. This is what barrier to entry means. Can you imagine starting your own business in the petroleum industry? If you consider how Petron, Shell, and Caltex are controlling the market, the risk is too high and the chances of expanding and surviving are low.

When a firm’s financial structure is good, it will take advantage of its position to control and influence the market. This market power is what sets oligopoly apart. Having an influence in the market, firms tend to raise their prices and produce less output. This leads to economic inefficiency (University of North Carolina). Also, since oligopolistic firms are harder to manage compared to monopolists, there is a decrease in productivity and efficiency. When it comes to cartels like the OPEC, the prices of a product tend to increase and the product’s availability is limited. There are also situations when prices are still high, even if collusion did not occur (Petroff). An example of this would be Apple and Samsung.

Lastly, there is a misdistribution of income when the market is far from competition. Since the firm will do what it can to maintain its power, it will hire the best workers with high salaries to support the company. However, based on a research by Dean Worcester, these workers do not always contribute their best as expected. The employees at the lower part of the ladder work equally as hard or even harder, but receive less salary (Worcester 9).

Going back to the Philippine Dealing System Holdings, the company uses its power to increase the fees and charges for consumers. This also built thicker barriers to entry. The money from this system is even big enough to help alleviate poverty in the country. The financial wedges from this business costs around P1 billion each year. The resources lost from this oligopoly could have been used to help the poor (Armas 61).

If oligopoly is not good, what is a better market structure? Though it is difficult to establish a market having perfect competition, a market structure near to this level of competition has its benefits. As mentioned earlier, comparing this to the structure of a “tiangge”, prices are most probably at the lowest average cost. People who want to start a business would not have a hard time entering the market. Since prices are more stable, it will be easier for consumers to manage their income (Tullao 143). By giving way and by not eating up the smaller businesses, the solution of having a nearly perfect competitive market can be achieved.

So how can imperfect competition “ruin” everyone concerned like what Mr. Tullao mentioned? Oligopoly robs people. It robs consumers of their money and opportunities. With the price padding they set, how much was added? How much could have consumers saved if there was no excessive padding? How many more people would be successful in building a business and earn a better livelihood if major companies did not buy them and “steal”