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Oligonomy Defined
The vocabulary of economists has no word to describe an increasingly common phenomenon. An oligopoly, as you know, is a market sector in which there are few sellers. An oligopsony is a market sector in which there are few buyers. But there are an increasing number of market sectors in which the same companies are both oligopolies and oligopsonies. This situation I propose to call an oligonomy.
In an oligonomy, companies act as an oligopoly to one group, as an oligopsony to another. For example, a handful of companies (McCormick, Durkee) buy most of the culinary herbs grown around the world. To the farmers, they constitute an oligopsony, and the farmers are at a disadvantage to them. To the markets that resell their wares, they are an oligopoly, with an advantage over those retailers. That is a simple oligonomy, basically where a few firms act like the gatekeepers between producers and retailers.
Another example occurs in the television sector. The handful of companies that own TV channels (Viacom, Disney, GE, etc.) are an oligopoly to those companies who want to buy ad time. They are an oligopsony to those studios that produce and sell programs.
But, as we've said, oligopolies breed oligopsonies, as companies must consolidate to try to defend their interests. Only an oligopsony can stand toe-to-toe with an oligopoly. When several layers of the market have this opposition set up, we have a tiered oligonomy. Some examples:
A small number of health insurers act as oligopolies to the companies that buy their group plans for their employees. In turn, they act as oligopsonies toward the hospitals, drug companies, and other health providers whose services their insured members buy. This is a typical oligonomy, where the insurance companies have an advantage in both directions. But what happens next makes it become a tiered oligonomy; hospitals combine forces in hospital groups to stand tall against the insurance companies. Likewise the drug companies get bigger so they can present strong oligopolies to insurance oligopsonies.
Safeway, Kroger, and Wal-Mart are part of a grocery oligopoly to shoppers. To food producers and food brokers, they are oligopsonies. In turn, as we have shown elsewhere, food brokers act as oligopolies to the supermarkets. To the small food producers, they act as oligopsonies. The whole system is a tiered oligonomy. And we can extend that. The few vendors, say, that provide ice cream are an oligopsony to dairy farmers, and an oligopoly to the supermarkets.
In the global chocolate industry, there are now basically two companies (Archer-Daniels-Midland and Cargill) that buy most of the coca beans. They are an oligopsony to the farmers in West Africa. In turn they act as an oligopoly to the chocolate manufacturers. There are four major chocolate producers (Nestle, Kraft, Mars, Hershey). These four act as an oligopsony to the cocoa merchants, and they act as an oligopoly to the shops and markets that sell their candy. And the big supermarkets, as we have seen, become an oligopsony/oligopoly in turn.
The chocolate oligonomy
Cocoa growers
Oligopsony for cocoa beans
Cocoa processors (ADM, Cargill)
Oligopoly for processed cocoa
Oligopsony for processed cocoa
Chocolate makers (Kraft, Nestle, Mars, Hershey)
Oligopoly for chocolate candy
(Partial) oligopsony for chocolate candy
Key retailers (Wal-Mart, Safeway, CVS)
(Partial) oligopoly for retail candy
Candy eater
The formation of tiered oligonomies helps explain the rapid concentration in most industries. A new oligopoly or oligopsony restores, to some extent, balance between layers of the market. But in most cases, two distinct groups are left out of any oligonomy. Individual end-users (shoppers, patients, TV watchers) have only one power in an oligonomy, that of refusing (easier done when buying candy or watching TV than when having an appendix removed). These choices are hard to organize and to sustain. On the other hand, the workers or small producers who are at the other end of the oligonomy have little power. The cocoa grower, the dairy farmer, the nurse, the cameraman have little leverage in the oligonomy. Exceptions include growers associations and unions, but these have been losing ground fast in the last twenty years.
As I see it, oligonomies are spreading in almost every market and market segment. Being both an oligopoly and an oligopsony is a very advantageous position. But it is also, for many companies, a necessary defensive move.
Source: www.oligopolywatch.com
REBUTTAL COMMENT
You should not dismiss the role of unions and growers' associations so easily. Sure, unions in developed countries are losing ground because they have accomplished most of the admirable corrections to unfair wages and miserable working conditions that were their original raison d'etre. Today many of them have themselves become oligarchies making a show of pitting the greed of their employees against the greed of the corporations' managers. In undeveloped countries, however, they can still operate to address basic human exploitation or misery. In fact, oligonomy can be made self-correcting, fair, and desirable by ensuring unions perform the vital function of ensuring oligonomies are good and not bad. A good oligonomy includes a direct information link from supplier and consumer, which is what is missing from the bad oligonomy model you describe. A bad oligonomy leads to unfair exploitation of both farmers and consumers. To use your chocolate industry example, chocolate grower associations or unions work along with an independent standards setting body to codify fair labour/farming practices. Consumer products that meet these standards are labelled as such. A judiciary enforces true and not misleading labelling practices. The consumer can confidently read the codified practices represented by the label and decide how much extra to pay for certified fair trade chocolate rather than unlabelled chocolate picked by slave labour. This empowers the consumer with options other than just refusal. This, in turn drives the middleman oligopolies to better the lot of humanity as well as themselves. It also suggests the oligonomy in and of itself may not be a bad thing provided that it is not enacted as a hierarchical structure with producer and consumer at bottom tiers separated by intervening layers of oligopolies as in your blog. The good oligonomy is rather modeled as a ring structure with producer and consumer having both a direct informational link (e.g. through the chocolate grower association label) and an indirect physical link through the commodity distributed by the intervening layers of oligopolies.
IMFutureTrends • 11/29/06; 12:17:02 AM
In an oligonomy, companies act as an oligopoly to one group, as an oligopsony to another. For example, a handful of companies (McCormick, Durkee) buy most of the culinary herbs grown around the world. To the farmers, they constitute an oligopsony, and the farmers are at a disadvantage to them. To the markets that resell their wares, they are an oligopoly, with an advantage over those retailers. That is a simple oligonomy, basically where a few firms act like the gatekeepers between producers and retailers.
Another example occurs in the television sector. The handful of companies that own TV channels (Viacom, Disney, GE, etc.) are an oligopoly to those companies who want to buy ad time. They are an oligopsony to those studios that produce and sell programs.
But, as we've said, oligopolies breed oligopsonies, as companies must consolidate to try to defend their interests. Only an oligopsony can stand toe-to-toe with an oligopoly. When several layers of the market have this opposition set up, we have a tiered oligonomy. Some examples:
A small number of health insurers act as oligopolies to the companies that buy their group plans for their employees. In turn, they act as oligopsonies toward the hospitals, drug companies, and other health providers whose services their insured members buy. This is a typical oligonomy, where the insurance companies have an advantage in both directions. But what happens next makes it become a tiered oligonomy; hospitals combine forces in hospital groups to stand tall against the insurance companies. Likewise the drug companies get bigger so they can present strong oligopolies to insurance oligopsonies.
Safeway, Kroger, and Wal-Mart are part of a grocery oligopoly to shoppers. To food producers and food brokers, they are oligopsonies. In turn, as we have shown elsewhere, food brokers act as oligopolies to the supermarkets. To the small food producers, they act as oligopsonies. The whole system is a tiered oligonomy. And we can extend that. The few vendors, say, that provide ice cream are an oligopsony to dairy farmers, and an oligopoly to the supermarkets.
In the global chocolate industry, there are now basically two companies (Archer-Daniels-Midland and Cargill) that buy most of the coca beans. They are an oligopsony to the farmers in West Africa. In turn they act as an oligopoly to the chocolate manufacturers. There are four major chocolate producers (Nestle, Kraft, Mars, Hershey). These four act as an oligopsony to the cocoa merchants, and they act as an oligopoly to the shops and markets that sell their candy. And the big supermarkets, as we have seen, become an oligopsony/oligopoly in turn.
The chocolate oligonomy
Cocoa growers
Oligopsony for cocoa beans
Cocoa processors (ADM, Cargill)
Oligopoly for processed cocoa
Oligopsony for processed cocoa
Chocolate makers (Kraft, Nestle, Mars, Hershey)
Oligopoly for chocolate candy
(Partial) oligopsony for chocolate candy
Key retailers (Wal-Mart, Safeway, CVS)
(Partial) oligopoly for retail candy
Candy eater
The formation of tiered oligonomies helps explain the rapid concentration in most industries. A new oligopoly or oligopsony restores, to some extent, balance between layers of the market. But in most cases, two distinct groups are left out of any oligonomy. Individual end-users (shoppers, patients, TV watchers) have only one power in an oligonomy, that of refusing (easier done when buying candy or watching TV than when having an appendix removed). These choices are hard to organize and to sustain. On the other hand, the workers or small producers who are at the other end of the oligonomy have little power. The cocoa grower, the dairy farmer, the nurse, the cameraman have little leverage in the oligonomy. Exceptions include growers associations and unions, but these have been losing ground fast in the last twenty years.
As I see it, oligonomies are spreading in almost every market and market segment. Being both an oligopoly and an oligopsony is a very advantageous position. But it is also, for many companies, a necessary defensive move.
Source: www.oligopolywatch.com
REBUTTAL COMMENT
You should not dismiss the role of unions and growers' associations so easily. Sure, unions in developed countries are losing ground because they have accomplished most of the admirable corrections to unfair wages and miserable working conditions that were their original raison d'etre. Today many of them have themselves become oligarchies making a show of pitting the greed of their employees against the greed of the corporations' managers. In undeveloped countries, however, they can still operate to address basic human exploitation or misery. In fact, oligonomy can be made self-correcting, fair, and desirable by ensuring unions perform the vital function of ensuring oligonomies are good and not bad. A good oligonomy includes a direct information link from supplier and consumer, which is what is missing from the bad oligonomy model you describe. A bad oligonomy leads to unfair exploitation of both farmers and consumers. To use your chocolate industry example, chocolate grower associations or unions work along with an independent standards setting body to codify fair labour/farming practices. Consumer products that meet these standards are labelled as such. A judiciary enforces true and not misleading labelling practices. The consumer can confidently read the codified practices represented by the label and decide how much extra to pay for certified fair trade chocolate rather than unlabelled chocolate picked by slave labour. This empowers the consumer with options other than just refusal. This, in turn drives the middleman oligopolies to better the lot of humanity as well as themselves. It also suggests the oligonomy in and of itself may not be a bad thing provided that it is not enacted as a hierarchical structure with producer and consumer at bottom tiers separated by intervening layers of oligopolies as in your blog. The good oligonomy is rather modeled as a ring structure with producer and consumer having both a direct informational link (e.g. through the chocolate grower association label) and an indirect physical link through the commodity distributed by the intervening layers of oligopolies.
IMFutureTrends • 11/29/06; 12:17:02 AM
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Comment by Cromag on May 7, 2009 at 12:16pm
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Oligopolies have been around as long as commerce has. The term denotes a situation where there are few sellers for a product or service. The members of an oligopoly change the nature of a free market. While they can't dictate price and availability like a monopoly can, they often turn into friendly competitors, since it is in all the members' interest to maintain a stable market and profitable prices.
The new oligopoly is made up of multinational corporations that have chosen specific product or service categories to dominate. In each category, over time, only two to four major players prosper. Starting a new company in that market segment is difficult, and the few that do succeed are often gobbled up or run out of business by the oligopolies.
Few multinationals aspire to be monopolies. Monopolies attract government regulation and consumer anger (just ask Microsoft). Small oligopolies (such as Coke, Pepsi, and Cadbury-Schweppes) make plenty of money and avoid the constant attention of the regulators.
From OligopolyWatch.com
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