Is Oligopoly Always Bad?
““Policy-makers should see innovations as practices that bridge supposedly competing public policy goals.””
Oligopoly falls between monopoly - where one company rules - and perfect competition, in which many companies compete and no single company sets market prices. In an oligopoly, a few big companies compete with each other, but not primarily by trying to charge the lowest prices, which are thus usually higher than in a perfectly competitive market.
Recently, Noble Laureate and Economist Nouriel Roubini spoke on the role of oligopolies hampering economic growth in India. He argued that India was not able to achieve its potential growth because a few producers and suppliers were dominating the market, which was hampering competition and innovation. This hinders the motivation to search for means to better use existing resources for growth. The information technology sector provides a contrast, where a level-playing field has led to huge increases in productivity.
However, high level of economic growth is possible even in oligopolistic markets. In his book, The Free-Market innovation machine: analysing the growth miracle of Capitalism, William Baumol, Professor Emeritus at Princeton University, provides some insights on how this is possible with the appropriate economic policies. Baumol’s basic argument is that entrepreneurs are found in every type of system: what matters is whether or not they devote their energies to producing innovations that add to economic growth. And this depends on the incentives provided by the economic system to entrepreneurs.
If, entrepreneurs are frequently rewarded for innovations that contribute to growth, then growth happens. If innovation is channeled towards finding clever ways to win patronage of the state, creating monopolies, or crime, then growth is retarded. Oligopoly has the potential to lead to growth if oligopolists are incentivized to compete by making their products or service characteristics stand out to consumers because they are different from rivals.
Moving beyond conventional thinking, Baumol talks of the important role played by large established companies in innovations. This happens because large companies have the resources to invest in “routinised’ innovation. In other words large companies are better at making innovation into a more regular and predictable activity. So, if routinized innovation is incentivized by the economic system, then innovation occurs all the time, and leads to increases in productivity and growth.
Noteworthy is the argument made by Baumol that the industrial structure that fosters productive innovation best is oligopoly, because the rapid dissemination of innovation through the economy via spill-over effects has a hugely positive impact on economic growth. Therefore, competition through innovation by oligopolists has the potential to become the main driving force of growth and higher living standards. This is in direct contrast to the widely held view that oligopolies are always a threat to the public interest.
National champion policies in the Xi Jinping model in China; keiretsu model in Japan or the chaebol model in Korea, provide some indirect examples of Baumol’s argument. In the national champion policy, governments expect one domestic corporation or an oligopoly of such corporations, typically in strategic sectors (whether private or state-sponsored) to seek profit and to “advance the interests of the nation”. Some examples are - Toyota, Soni in Japan, Samsung, Hyundai and LG in Korea and Alibaba, Tencent and Huawei in China. In all these cases, markets are dominated by limited, and often, big companies.
The purpose of this piece is to stimulate an unconventional approach, in the way proposed by Bish Sanyal, Ford International Professor of Urban Development and Planning in the Department of Urban Studies and Planning at MIT. Policy-makers should see innovations as practices that bridge supposedly competing public policy goals. Public policy goals are often cast in either/or terms, implying a zero-sum situation: for example, either economic growth or social redistribution; either encouragement of private investment or enforcement of regulations; either enhancement of standards of service provision or universal service delivery; either competitive markets or oligopolistic/monopolistic markets, and so on.
Similarly, in standard accounts of how public policies are formulated, technical expertise and “political interference” are viewed as diametrically opposite types of input. Such orthodox assumptions do not allow creative thinking about how to achieve dual-positive, rather than zero- sum, outcomes.
