An oligopoly has various academic definitions that describe the same kind of market structure: an inefficient market with market power concentrated in a small number of firms where consumers are overpaying for the particular good or service at a given level of quality. Overpaying takes various forms including an inferior product being overcharged for, or an OK product commanding a significant price premium due to the market structure (e.g. artificially restricted supply).
Sometimes oligopolies are disguised as competitive markets, sometimes this is by accident but most of the time, this is by design of the key market actors.
In Australia, superannuation is an example of a large oligopolistic market. It spends millions of other people’s money to maintain the illusion of competition, but does not have the reality of it.
How to work out if a market is an oligopoly
- Market share is consolidated in a small number of large firms.
- The large firms have been in the market for a long time i.e. none of the large incumbent players are new firms (new being post-internet era).
- Limited technology absorption and adoption by the large market participants i.e. products are not evolving with the times.
- Market share not correlated to product or service quality or price i.e. better products don’t gain market share over time.
- Good entrepreneurial businesses acquired quickly and shelved or drowned by regulators in uneven scrutiny.
Why is it preferred to enter oligopolies over competitive markets as a start-up?
- Compared with competitive markets, in oligopolies incumbents have forgotten how to compete and are easier to outmanoeuvre at market-entry and going forward.
- The people who made the oligopolist firm what it is today are generally no longer involved in the business and have been replaced with salaried bureaucratic executives, not founder executives.
- The oligopolist will have lost its talent edge and will likely have no “zero to one” credentials to respond to you if you can hit the market with genuine innovation.
- The market size & revenue opportunity is easy to model as you just need to sum up the current market impact of a few incumbent firms to get an accurate picture.
What are some of the challenges in fighting oligopolists?
- The oligopolist gravy train runs deep and much deeper than you think. Do not underestimate the supply chain, distribution chain, media and regulator alignment to the status quo and mean-reversion impact that they will have against your entry. To survive, you will often have to show the ecosystem around the incumbents that there will be more gravy with you or you need a thick enough skin / capital moat to blast through them and not require their support.
- You can accidentally invigorate the opponents & create excitement in the market which has the impact of money & talent flowing to one or more of the incumbents when they see the potential of what you’re doing, making them worthier competitors. You need to remain discreet for as long as possible, and when you do launch, strike hard and fast and manage leaks / defection risk carefully until launch.