Oligopoly, Essay Example

The four-firm concentration ratios for the fluid milk industry, women’s and girl’s cut & sew dresses industry, envelopes industry, and electronic computers industry are42.6%, 18.2%, 51.1%, and 75.5% respectively(US Census Bureau, 2006). The four-firm concentration ratios imply that fluid milk, envelopes, and electronic computers industries are characterized by low competition while women’s and girl’s cut & sew dresses industry is high competitive. But a look at the market share controlled by twenty largest firms shows that fluid milk and envelopes industriesare at least moderately competitive. This is because the twenty largest firms at best control approximately three-fourth of the market share in both these industries. In comparison, eight largest firmsalone control approximately 92% in the electronic computers industry.

Oligopoly market structure is defined by the majority control of the industry by few firms (Investopedia). Going by this definition, envelopes and the electronics computer industries can be classified as oligopolies because in both these industries, four firms control more than half of the entire market share. Some of the leading firms in the fluid milk industry include Dean Foods, California Dairies Inc., and Northwest Dairy Association. Leading players in the electronic computer industry include Dell, Lenovo, and Acer. HP would have made the list as the largest seller of computers but it recently exited the personal computers sector.

Dean Foods is the largest U.S. processor and distributor of milk, creamer, and cultured dairy products. The company markets its products under more than fifty local and regional dairy brands as well as through private labels. The company also sells soy and plant-based beverages and foods and coffee creamers under brands such as Silk, International Delight, and Land O’Lakes. Dean Foods employs some 25,000 employees in its approximately 100 plants across the U.S. and Europe (Dean Foods). California Dairies is one of the largest dairy processing cooperatives in the U.S. Its members produce 17 billion pounds of milk a year and its plants also process milk into butter, cheese, and powdered milk for commercial and consumer use. California Dairies also has a majority control in DairyAmerica which markets some 40% of all the milk powder produced in the U.S. (Hoovers). Northwest Dairy Association is another major cooperative whose 500-plus members produce 7.2 billion pounds of milk annually which is processed and sold under the Darigold label. Northwest Dairy also produces butter, cottage cheese, sour cream, and yogurt. It’s customers include wholesalers and retailers as well as foodservice and food manufacturing companies (Hoovers).

After HP’s exit from the personal computers sector, Dell is slated to become the world’s largest seller of computers though it will still face tough competition from Lenovo, Acer, and other predominantly Asian brands which are also eyeing HP’s customer base in the personal computer sector. In addition to personal computers, Dell also sells network servers, data storage systems, printers, and Ethernet switches among other products. The company generates nearly half of its revenues outside the U.S (Hoovers). Lenovo was already the largest PC maker in China when it bought IBM’s PC operations to gain entry into lucrative international markets such as the U.S. Like Dell, Lenovo also offers workstations, servers, storage drives, and IT services. Like Dell, Lenovo also generates about half of its total revenues from outside its home base China and the greater Asia/Pacific region (Hoovers). Lenovo will probably emerge as the closest competitor to Dell in the personal computer sector after HP’s exit. Taiwan based Acer is also one of the world’s leading personal computers brand. The company mainly sells its products through resellers and distributors worldwide and outsources its manufacturing. In addition to the mainstream Acer brand, the company also owns Gateway, eMachines, and Packard Bell brands. Acer generates nearly half of its revenues in Europe (Hoovers).

Oligopolies are not always bad for societies. This is because sometimes the nature of the industry is such that the products become commodity and there is little potential for differentiation or innovation. Thus, one way for the existing players to maintain profitability is through economies of scale. As a result, the industry can support only few large players. It also benefits the customers because economies of scale lead to lower prices as well. This is exactly what has happened in the PC industry over the last few decades as prices of personal computers from all manufacturers including Dell, Acer, and Lenovo etc. have dropped despite steady improvements in speed and quality of computing technologies.

The nature of the industry may also be such that it requires extensive capital investment. Thus, not many companies have required resources and those who have will invest only if they can expect to recover their costs as well as earn profits. Oligopoly can support such an industry because major oligopoly firms have large enough market shares to justify their capital investments. Oligopoly market structure is also formed when numerous small companies merge together because they can’t compete effectively as small players. By joining hands, they also expect to gain more negotiating power against customers. California Dairies and Northwest Dairy Association are cooperatives consisting of thousands of members who have joined hands to get better prices for their products. In addition , they are also able to compete against major competitors such as Dean Foods who might have driven many of them out of business had they not joined a cooperative.

References

Dean Foods. (n.d.). Partnering With Mother Nature. Retrieved August 28, 2011, from http://www.deanfoods.com/our-company/about-us.aspx

Hoovers. (n.d.). Acer Incorporated. Retrieved August 28, 2011, from http://www.hoovers.com/company/Acer_Incorporated/ctchri-1.html

Hoovers. (n.d.). California Dairies Inc. . Retrieved August 28, 2011, from http://www.hoovers.com/company/California_Dairies_Inc/ckjrki-1-1njdap.html

Hoovers. (n.d.). Dell Inc. Retrieved August 28, 2011, from http://www.hoovers.com/company/Dell_Inc/ryrsyi-1.html

Hoovers. (n.d.). Lenovo Group. Retrieved August 28, 2011, from http://www.hoovers.com/company/Lenovo_Group_Limited/hjktji-1.html

Hoovers. (n.d.). Northwest Dairy Association. Retrieved August 28, 2011, from http://www.hoovers.com/company/Northwest_Dairy_Association/rfhxrhi-1-1njdap.html

Investopedia. (n.d.). Oligopoly. Retrieved August 28, 2011, from http://www.investopedia.com/terms/o/oligopoly.asp#axzz1WNm1d1ne

US Census Bureau. (2006). Concentration Ratios: 2002. U.S. Department of Commerce.