Oligopolies for the win: A case for fostering competitive conglomerates in critical sectors

This essay is rooted in my sister’s fascination with everything South Korean. A few weeks back she was explaining to me that the K-pop music landscape – consisting of a range of globally popular bands – is dominated by a handful of big talent management companies. Further, she explained that four big entertainment companies are responsible for most of the K-pop talent. They recruit talented individuals, form bands, create a brand identity around, and promote them and manage their finances. Essentially, the success of the K-pop industry is based on its functioning along oligopolistic lines, which is encouraged and assisted by the government. All of this is a true reflection of the South Korean economy, where the government favors the top conglomerates which collectively contribute nearly 80% of the GDP.

Taking inspiration from South Korea, I believe that it is futile for the Indian government to make policies aimed at maximizing social welfare through “perfect competition.” For a developing economy like India, a more realistic alternative lies in embracing an oligopolistic market model that has significant regulation by the government. To begin with, the assumptions underlying “perfect competition” are entirely unrealistic in the Indian context. Sellers and buyers both have a significant impact on market price, there is significant product differentiation, there are several sector and industry specific entry barriers for new firms, and finally there is widespread information asymmetry amongst the key market players. Most of these characteristics cannot be resolved through policy interventions. Hence, the idea of maximizing consumer surplus and thereby social welfare through policies aimed at “perfect competition’ is unrealistic. A more feasible approach would be to maximize social welfare by working on what is next best to perfect competition – an oligopolistic market structure. Elaborating on the South Korean example, I would like to briefly reflect upon the way economies across the globe have moved from developing to developed status. Barring the countries that benefited from relatively early industrialization, very few countries have made the leap to the status of developed economies. The most notable amongst these countries are Japan and South Korea. They’re relevant for India as they had a success story like the current Indian ambition – countries with high population density where most of the workforce was engaged in agriculture becoming high quality export powerhouses. It is interesting to take note that in both these countries the governments favored and assisted the development of large conglomerates (chaebols in South Korea, and keiretsu in Japan) that have a dominating role in the economy.

With this context, I believe that the Indian government should frame policies that helps grow large multisectoral conglomerates. If the Indian government can ensure that the oligopolistic actors are competing and not cartelizing, there are immense benefits to developing such conglomerates operating in an oligopolistic manner across multiple key sectors. Most desirably, compared to small and medium size companies, large conglomerates (through tools like mergers and acquisitions) can achieve “economies of scale” far more effectively. This is important as lower costs of production (and thereby lower costs to consumers) would lead to greater social welfare by positively impacting both producer’s profit and consumer surplus. On top of that, such firms have greater resources to invest in infrastructure enhancement and R&D compared to small and medium size companies. This leads to improvements in product quality and technology, which (coupled with lower production costs) helps products become competitive in the export market. Lastly, such conglomerates can significantly improve job creation in an economy. Since they operate in multiple sectors and industries and in various capacities, these large companies can create a wide variety of jobs directly. Moreover, through the trickle-down effect, they can create indirect opportunities in various industries for individuals and smaller firms to service their needs. All these aspects are crucial for India’s economic growth ambitions. Based on these positive aspects of competitive conglomerates in an oligopoly, it is prudent to argue that a policy focus on assisting the development of certain large conglomerates in the key sectors of the economy would be hugely beneficial for the country. Therefore, when the Indian government assists large companies grow into conglomerates, it should be seen as a positive economic measure. However, there is a fine line between impartial assistance and cronyism. For example, Reliance Jio indulged in predatory pricing and the regulatory authority chose not to act.

At the same time, the government chose to go after one of its significant competitors (Vodafone Idea) demanding retrospective taxes. Similarly, the Adani group was given contracts and bids in various industries despite there being larger more efficient conglomerates competing with it in those spaces. Such measures reek of cronyism rather than an impartial policy attempt at developing competitive conglomerates. Rather, the government should simply focus on ensuring that firms don’t collude in the market. There should be equal opportunities for the existing major players and the government should ensure that these players continue to be competitive and are protected from external threats to their position in the market. Protecting them from external competition through market entry barriers while providing innovation-based incentives would go a long way in assisting their growth and helping them become export behemoths.