Wall Street Journal
March 8, 1999
Many Industries Are CongealingBy G. PASCAL ZACHARY
Into Lineup of Few Dominant Giants
Staff Reporter of THE WALL STREET JOURNAL
If you want to understand the big force underlying the past decade of megamergers, here's one word: oligopoly.
Everywhere you look, industries are sorting themselves out into their own version of the Big Three auto makers. In the accounting business, it's the Big Five. In cigarettes, as in cars, it's the Big Three. Telecommunications, music, soft drinks and countless other industries are congealing into their own lineups of just a few dominant giants.
And in the latest frenzy of deals, oligopolies are starting to go global. Look at Daimler AG's merger with Chrysler Corp. and British-based Vodafone Group PLC's planned purchase of the U.S.'s AirTouch Communications Inc., a deal that will create the world's largest wireless carrier.
Says Louis Galambos, a leading business historian at Johns Hopkins University, "Global oligopolies are as inevitable as the sunrise."
Often accused of seeking to achieve a monopoly, or sole dominance of a market, corporations actually seem to prefer splitting a market with a few rivals. Why do so many industries find a natural equilibrium with a small number of big players? The reasons are practical, economic and even psychological.
In a 1994 paper, titled "The Triumph of Oligopoly," Mr. Galambos observed that American business leaders long have preferred oligopoly to monopoly because it allowed them to retain a degree of competition without ceding too much control.
Monopolies either must submit to regulation -- utility companies, for example -- or risk having regulators break them up. Oligopolies occupy a different world. A concentrated, but not overly concentrated, industry has special benefits for business and maybe even consumers.
'Proved to Be Beneficial'
"Oligopolistic competition," Mr. Galambos wrote, has "proved to be beneficial ... because it prevented ossification, ensuring that managements would keep their organizations innovative and efficient over the long run."
Market leaders need challengers to keep them on their toes. Consider Microsoft Corp.'s curious love-hate tango with Netscape Communications Corp. In the ongoing government antitrust trial, Microsoft faces allegations that it first proposed dividing the Internet-browser market with Netscape, creating a nice little oligopoly for the two of them, and then attempted to crush the fledgling company when it refused. Microsoft denies that occurred. Still, it is clear that Netscape's existence prodded Microsoft to pour huge resources into improving its own browser.
Or think about the famous public rivalries of Madison Avenue lore, such as the Hertz-Avis battle of the 1970s, the long-running Coke-Pepsi feud and the current slugfest between Visa and American Express. In each of these face-offs, a large, well-known opponent has made a useful foil for advertising -- and, perhaps, creating -- product distinctions.
To Americans worried about concentrated economic power, what seems like the natural drive to oligopoly "is a chilling development," says John Cavanagh, director of the Institute of Policy Studies, a Washington think tank. However beneficial mergers seem initially, he says, in the long run they lead to unfair competition and price-gouging by the survivors. "What needs to be broken are the spurious arguments that somehow this is good for most of us," he says.
Yet in industry after industry, the march toward consolidation has seemed inexorable. With the Daimler-Chrysler deal now complete and the deal between Ford Motor Co. and Volvo AB pending, the world automobile industry is coalescing into six or eight companies. Two U.S. car makers, two Japanese and a few European firms are among the likely survivors.
The world's top semiconductor makers number barely a dozen. Four companies essentially supply all of the world's recorded music. Ten companies today dominate the world pharmaceutical industry, and that number is expected to decline through mergers as even these giants fear they are too small to compete across the globe.
In the global soft-drink business, just three companies matter, and the smallest, Cadbury Schweppes PLC, in January sold part of its international business to Coca-Cola Co., the leader. Just two names run the world market for commercial aviation: Boeing Co. and Airbus Industrie.
"What you have is a chain reaction," explains Sam Gibara, chairman and chief executive of Goodyear Tire & Rubber Co. "We're going global because our customers are going global. Then, to the extent that we go global, our suppliers have to go global." Goodyear recently expanded an alliance with Sumitomo Rubber Industries Ltd. of Japan, an arrangement that effectively creates a new No. 1 tire supplier to the world.
One reason regulators are doing little to halt the trend may involve an apparent paradox: A high degree of market concentration often promotes competition, while fragmented markets can cost consumers more. Norbert Walter, Deutsche Bank's chief economist, illustrates the point by imagining a world of only corner grocery stores and no supermarkets. There would be plenty of variety, but less competition. "Little retailers on every corner doesn't translate into lower prices," he says.
Forging Common Standards
Another advantage of oligopoly for both businesses and consumers: It's easier to forge common standards. This is especially helpful in periods of rapid technological change. In the early 1980s, for example, Sony Corp. and Philips Electronics NV reached an accord on the compact-disk format. The two leaders in consumer audio could have battled for supremacy, but by pooling their efforts they set the stage for the enthusiastic acceptance of the CD.
Still, oligopolies present governments and consumers with serious threats. In the U.S., railroad mergers have spawned many complaints from customers of price gouging and service disruptions. In Europe and Japan, national oligopolies are famous for fixing prices. Some mergers are motivated by the threat of falling profits and prices as much as by the chance to increase market power.
Government trust busters aren't the only force that can break an oligopoly's grip. While standard-setting can enhance an oligopoly's power -- look at the way Microsoft and Intel Corp. control the personal-computer industry through their design choices -- technological innovations can topple giants, too.
"Technology has splintering effects," says John Stopford, a professor of international business at the London School of Business. "Yesterday's industries are consolidating, and we are getting world oligopolies, for sure. But tomorrow's industries are bringing forces of fragmentation."
A prime example of this comes in bookselling. The past 20 years saw the rise of national chain stores, then superstores such as Borders and Barnes & Noble. Just when it looked as if they had the market sewn up, along came Amazon.com Inc. Suddenly, the big guys had a new fight.
Even Microsoft faces a threat outside of the courtroom. The sudden appearance of Linux, a piece of free software created by a Finnish university student, could conceivably erode Microsoft's hegemony over operating systems.
At times the government does step in to break up a market. Yet the continued impulse to consolidate remains. "The old oligopoly gets busted up, and a new one gets created," Mr. Stopford says.
Look at airlines. The U.S. government removed restrictions on the nation's airlines in the late 1970s, sparking wave after wave of new entrants and leading to dramatic declines in ticket prices. But in recent years, a few major airlines, along with one former upstart, Southwest Airlines Inc., have asserted control. With the rise of a new oligopoly, prices are climbing and U.S. airlines earned record profits of $5 billion in 1998, Merrill Lynch & Co. estimates.
The airline case suggests that oligopolies aren't always benign and that the old animus against them may rise again. "The more you liberalize, the more important it becomes for government to keep competitors honest," says Karl Sauvant, a senior researcher at the United Nations trade office in Geneva. Noting the recent explosion of cross-border mergers, he adds: "To the extent that you reduce barriers to trade and investment, the more you have to make sure these barriers aren't replaced by private barriers," such as price-fixing.
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