Oligopoly – Good or bad for the consumer?

There are good and bad aspects to an oligopoly, but if I had to make a choice, I would have to say that overall, I feel that oligopolies are good for the consumer.  Oligopolies create fewer choices for a consumer.  Some would say that this is bad, but I believe there can be, at times, too many choices that a consumer has to make.  Let’s take coffee for example.  When you go into a supermarket to buy coffee, you have a multitude of choices as far as brand, flavor, and even where the coffee beans are grown.  You have ground beans, whole beans, instant powder and instant coffee bags – each of those choices being brought to you by Sanka, Brim, Eight O’clock Coffee, Savarin, Chock Full O’ Nuts, and others.  Which to buy?  To be honest, I am one to think that buying something as simple as coffee should not be a heavy involvement decision, so I usually opt not to buy any of those choices and I am willing to drive out and buy my coffee by the cup. But where to go – if I go to Starbucks I am not much better off than the supermarket.  Try walking into Starbucks and asking for a cup of coffee.  You get asked questions like, House, Day Special, Lite Note?  Laté?  Frape?  Frapuccino? ; and a slew of other questions.  After answering those questions (or at least the ones you understand) the cup they give you doesn’t even have the milk or sugar in it.  Too many choices!  I would much rather be able to go into the grocery store and see three or four brands of coffee that I could buy, make a quick decision as to whether or not I wanted Colombian, decaffeinated, or regular and be on my way to the checkout.  For now though, I’ll just go to WaWa.

Oligopolies also lead to innovation with standardization.  One example that is still trying to find the "one" standard is digital photography.  Right now, there are many companies vying for position in the digital photography space. Most of the major players, like Nikon, Canon, and Kodak are developing their own standard for the digital storage card that the pictures are stored on.  This will change, and it will come from the “lesser” companies that understand that if they do not compete as one, they will fragment the market too much for any of them to gain any ground in the market.  You will see players like Agfa and HP working to add more utility to the storage card used in the camera (they have already done this using flash storage).  An Agfa or HP camera owner can print the digital photos without using a PC by using the HP photo printer.  The printer contains a slot for the memory card, so the consumer only needs to plug in the card and hit a button to print the pictures.  Nikon already sees the utility in this and switched its new line of cameras to use the flash media storage instead of the proprietary storage they were using previously.  As more camera manufacturers move to a standard, the prices will ultimately decrease for the cameras and the memory cards, because the companies will need to spend lees money on research and development, and will be able to use standardized parts for the camera instead of manufacturing proprietary pieces themselves.  I would expect over the next few months to years that the smaller players will either merge together, or be bought by the larger players to combine technology with marketing power, thus forming an oligopoly in the digital imaging industry.  In the end, the consumer wins with better products that work well together at lower prices.

Now, not every aspect of an oligopoly is good for the consumer.  Just as too many competitors can lead to too many choices, too few competitors can produce the opposite result.  In the airline industry, there are relatively few competitors, and relatively little differentiation between the competitors.  There was a time when this was good for the consumer.  The airlines wanted to gain customers and had price wars for fares, which resulted in very low airfares for the consumer.  However, as time went by, and because of the nature of the airline business, the airline companies stopped being innovative.  They realized, that  because they compete in a market which has incredibly high barriers to entry, new competitors could not easily enter the market, thus allowing the companies in the airline industry to raise prices without increasing service or innovation.  When an industry becomes stagnant, such as the case of the airline industry, the consumer ends up losing by paying higher prices for goods and services.

When I look at oligopolies in general, and there are many to look at, I see very few stagnant industries.  Most industries have become very technology driven, and technology constantly reinvents itself.  As a result, industries keep moving to benefit the consumer with added utility, better and cheaper product and services, etc.  It is because of this that I believe that oligopolies, for the most part, are beneficial to the consumer.