CONCLUSION

CONCLUSION

The dominant concern of any oligopoly is to preserve or increase its
economic power in the market place. In an ever-changing world
where markets are subject to sudden fluctuation and where business
rivalry is intense, an individual firm may at turns appear very
aggressive, or defensive, or very passive in its operations. But,
subject to short-term expediency, the analysis so far leads to the
following conclusions:
Oligopolists will
attempt to increase their share of whichever market they
operate in;
sacrifice short-term profits in order to secure long-term, competitive
advantage;
generally prefer to collude rather than compete on prices;
keep prices high and stable for as long as conditions allow;
exploit economies of scale to widen the difference between prices
and unit costs;
pay handsomely for any innovation that gives them a lead on
their rivals;
drive out or vigorously resist entry of new competitors;
manage the media, public opinion and government contacts to
resist any restriction on their operations;
not initiate any increase in supplies that weakens prices and
profits;
exploit any consumer dependency on their products.
It is not intended to portray all executives of big business as
heartless, greedy capitalists intent on grinding the fate of others
under the wheels of the corporate machine! Most business people
are hard-working family types intent on doing a professional job
and keeping their budgets in balance and their heads above water.
It is just that the structure of modern, competitive oligopoly
rewards ruthlessness, not compassion.
Where the temptation exists to make a fortune by bending the
law, ologopolists may frequently go too far (see box on Enron).
Large business empires can then go bust frighteningly quickly –
especially where rivals are only too happy to exploit any weakness
© 2004 Tony Cleaver
amongst their number. This merely increases the penalty of failure
and yet, by the same token, rewards are always greatest where
others fear to tread. Thus the incentive still remains to choose
investments that are morally questionable but highly profitable. It
is in such circumstances that ordinary members of the public must
hope that elected governments can set the rules of the game to
prohibit corporate abuses – and that they get to their political
leaders before big business does (Box 3.6).
The father of economics knew. In his famous book The Wealth of
Nations from which the quote earlier was taken, Smith also wrote:
‘People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices.’ It is a warning to
public authorities everywhere that oligopoly needs policing.
Box 3.6 Enron, Arthur Andersen and the dangers of crony capitalism
Enron began as a pipeline company in Houston, Texas, making
profits by selling gas to selected businesses at a future date at
an agreed price. The company successfully lobbied government
to deregulate electrical power markets and subsequently
expanded into trading electricity and other commodities. Soon it
was buying and selling all sorts of future contracts, making
money on the difference between buying and selling prices but
keeping its books closed so that few could see the profits it was
making.
Enron grew to become a giant financial and energy empire,
the volume of financial contracts eventually far outstripping its
trade in commodities. It subsequently poured millions of dollars
into US political parties, cultivating contacts in the White House,
in Congress and in the regulatory agencies that were
critical to the company’s growth. The Chief Executive Officer of
Enron, Kenneth Lay, became a close friend of President George
W. Bush.
By law, every publicly listed joint-stock company is required to
have its finances audited so that private investors can have
© 2004 Tony Cleaver
confidence that its accounts are an honest and fair record of its
business. This was undertaken by Arthur Andersen, one of the
United States’ largest accounting firms. But Andersen was also a
major business partner of Enron – selling it consultancy services
and using its name to solicit custom from other potential
clients. Andersen was responsible for some of Enron’s internal
bookkeeping, and executives from one enterprise would sometimes
seek employment in the other. Each business had a vested
interest in promoting the other. The relationship was uncomfortably
close.
In January 2001, Enron’s stock rose to over US$80 per share
on the New York Stock Exchange (NYSE) but not much later that
same year, rumours began to circulate that Enron’s profits were
not all as they had been reported to be. Internal whistleblowers
eventually alerted independent banks, regulators and congressional
investigators to inspect and uncover a complex web of
warped and off-balance-sheet dealings that concealed millions
upon millions of Enron debt.
By December 2001, Enron’s share price had collapsed to zero.
The company had in effect been declared worthless and its stock
was de-listed from the NYSE. Thousands of employees were
made unemployed and, worse, having been encouraged to
invest in Enron, they lost all their savings as well.
Several Enron executives were charged with breaking the law.
Andrew Fastow, the Chief Financial Officer who personally
gained around US$30 million (!) in corrupt management deals,
and his assistant Michael Kopper, who made US$7 million, were
variously charged with fraud, money laundering and conspiracy
to inflate Enron’s profits.
Meanwhile, auditors Arthur Andersen who were supposedly
responsible for uncovering the truth became instead the first
ever accountancy firm to be convicted of obstructing justice and
as such it can no longer perform audit work. As a result, the Big
Five US accountants (others being Deloitte & Touche, Ernst &
Young, KPMG International and Pricewaterhouse Coopers) are