By Louis H-P on November 17, 2020Reading Time: 3 minutes
As an investor you should have an idea of oligopoly examples. Knowing which firms dominate a sector will be an advantage. If you can understand why and how, you can increase your knowledge. In turn you can then incorporate this in your research of stocks, so as to identify companies with an economic moat.
Understand what is an oligopoly
Be aware of different kind of oligopolies
Why oligopolies can be positive but also a threat to your portfolio
An oligopoly is when a small group of companies dominate a market. This has the effect of giving them pricing power, and therefore less choice to consumers. In some cases this can lead to illegal behaviour, such as collusion or manipulating the market.
The most obvious ones today are the big US tech firms who are so big they buy up anyone who may compete with them. This means the consumer has little choice to go elsewhere. Who remembers MySpace? Facebook is so focused on defending it’s patch, that it virtually killed off MySpace by buying and pushing Instagram.
Oligopolies also have the advantage of being able to sue anyone into oblivion. Just googling ‘Facebook sues’, brings up pages of stories of legal proceedings initiated by Facebook.
Oligopolies are not limited to relatively new companies, old ones are at it too. BP has a dominant position in the oil market, but has been quietly developing its renewable energy business.
Indeed when you want to recharge your future electric car… where will you go? Most likely to a BP petrol station which has (already) got electric charge points. With all the best sites next to major roads, only Shell can really compete with BP in the UK.
As Boeing is a major employer in the USA and strategically important for defense reasons, it has some political protection. Typically you would not expect a government to stop competition. This is exactly what happened. When Airbus won the KC-135 next generation air refueling contract, US political voices ensured Boeing was allowed back in, and subsequently won the contract.
Airbus is not exactly a small company, but this was a first for it to get access to an important US defense contract. When a vested interest is involved, oligopolies suit a government.
Tesco dominates the UK grocery sector. Such is the dominance of Tesco that eyebrows were raised when the competition authority allowed it to take over Booker. The feeling was that this was too much concentration of the market in one pair of hands.
The rise of Aldi and Lidl, the German discounters, has shown that a new entrant can disrupt an oligopoly. They have each grabbed market share off the other supermarkets. They have done so with a cheaper price but also offering equivalent and often a better product.
Oligopolies are attractive to you because it means increased profits for the firms you own, due to their market dominance. Unfortunately most governments take a dim view of them and will consistently look to break them up. It is becoming increasingly clear that governments have Big Tech in their sights, with their dominant control over information a concern.
The European Union has been increasingly vocal as to what is sees as a lack of tax contribution by big tech companies. This will lead to an unpleasant situation for investors, where their tech investments are under a two pronged attack: increased tax and regulation!
Amazon dominates markets it enters.
You may also find yourself on the losing end of their dominance. When Amazon bought Whole Foods in the USA, shares in UK supermarkets immediately dropped. This was due to the dominance that Amazon strives for when it enters a market. This caused a fear they would also enter the UK grocery market. At the time of writing, Amazon is working with Morrisons, which would suggest it is interested in expanding in the food delivery business.
Oligopolies can be good for capital preservation, as a company with consistent profits will be rewarded with strong share price performance. This usually attracts the interest of the government. As a rule, it rarely leads to a positive outcome for investors. As a result, you should treat oligopoly examples as positive from a return perspective, but also with caution!