NESTLÉ, THE SWISS MULTI-national food and beverage company, is arguably the largest food company on the planet. Its list of popular product brands includes many names known around the world, with dozens of them earning more than $1 billion per year in revenue for the company. Most Canadians know the Nestlé name from either their popular bottled water or one of their many chocolate products, including KitKat, Smarties, and Coffee Crisp. In fact, Nestlé Canada is the market leader in Canada’s chocolate market, having captured about 16% of Canadian sales.

But on June 6, 2013 everything was certainly not sweet for Nestlé Canada. On that day criminal charges were laid against Nestlé Canada; Robert Leonidas, a former president of Nestlé Canada; Sandra Martinez, a former president of confectionery for Nestlé Canada; Mars Canada; ITWAL Limited (a national confectionary distributor); and David Glenn Stevens, president and chief executive officer of ITWAL. Those charged, along with Hershey Canada Inc., are alleged to have conspired, agreed, or arranged to set prices of chocolate products, behaviour called price-fixing. Executives of each company supposedly met secretly in coffee shops and restaurants and at industry conventions to set prices. It is alleged that from 2002 to 2007 the chief executive of Nestlé Canada took a lead role and even handed envelopes stuffed with pricing information and instructions to competitors.

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’ve 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 behaviour that got Nestlé and other Canadian chocolate producers and distributors 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 2010, the European Union, which has laws similar to those in Canada, fined 11 airlines $1.11 billion (yes, that’s billion) for price-fixing of air cargo prices. This price-fixing also resulted in the U.S. Department of Justice imposing more than $1.8 billion in criminal fines against more than 20 airlines, jail terms for four airline executives, and a class action lawsuit settlement cost for airlines of another $500 million. The Canadian Competition Bureau has extracted more than $25 million in fines from 9 airlines for price-fixing and continues to pursue cases against several more.¹

We will begin by examining what oligopoly is and why it is so important. Then we’ll turn to the behaviour of oligopolistic industries. Finally, we’ll look at competition policy (also called antitrust policy), which is primarily concerned with trying to keep oligopolies “well behaved.”