THE AGRICULTURAL PRODUCTS company Archer Daniels Midland (also known as ADM) has often described itself as “supermarket to the world.” Its name is familiar to many Americans not only because of its important role in the economy but also because of its advertising and sponsorship of public television programs. But on October 25, 1993, ADM itself was on camera.
On that day executives from ADM and its Japanese competitor Ajinomoto met at the Marriott Hotel in Irvine, California, to discuss the market for lysine, an additive used in animal feed. (How is lysine produced? It’s excreted by genetically engineered bacteria.) In this and subsequent meetings, the two companies joined with several other competitors to set targets for the market price of lysine, behavior called price-fixing. Each company agreed to limit its production in order to achieve those targets. Agreeing on specific limits would be their biggest challenge—or so they thought.
What the participants in the meeting didn’t know was that they had a bigger problem: the FBI had bugged the room and was filming them with a hidden camera.
What the companies were doing was illegal. To understand why it was illegal and why the companies were doing it anyway, we need to examine the issues posed by industries that are neither perfectly competitive nor purely monopolistic.
In this chapter we focus on oligopoly, a type of market structure in which there are only a few producers. As we’ll see, oligopoly is a very important reality—much more important, in fact, than monopoly and arguably more typical of modern economies than perfect competition.
Although much that we have learned about both perfect competition and monopoly is relevant to oligopoly, oligopoly also raises some entirely new issues. Among other things, firms in an oligopoly are often tempted to engage in the kind of behavior that got ADM, Ajinomoto, and other lysine producers into trouble with the law. Over the past few years, there have been numerous investigations and some convictions for price-fixing in a variety of industries, from insurance to elevators to computer chips. For example, in 2012, the European Union, which has laws similar to those in the United States, fined six electronics companies $1.92 billion (yes, that’s billion) for price-fixing of television components.
We will begin by examining what oligopoly is and why it is so important. Then we’ll turn to the behavior of oligopolistic industries. Finally, we’ll look at antitrust policy, which is primarily concerned with trying to keep oligopolies “well behaved.’’