An Oligopoly’s self imposed Path to Destruction and Disgrace

FF343BE0-2FD9-4E04-B847-0297BE39B0ED.jpegOligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others. Oligopolies in history include steel manufacturers, oil companies, rail roads, tire manufacturers, grocery store chains, and wireless carriers. The accounting firms like Big 4 or 10 are not considered as they probably don’t meet certain criteria, one being they’re definitely not price setters. 

In the accounting industry due to re-tendering  and rotations the fee is on the decline, the regulatory requirements are on the rise and risk of failure is on the rise due to increased complexity of business. Though risk is increasing – profitability is declining, the need for good talent is increasing but the pay scales can’t keep up due to reducing fees. The regulators in every global market are moving the goal post for quality, requiring more work for which the profession has to invest in better technology and more talent. This scenario is disproving the historical economic sense of high risk will have higher return or more demand will push the price (salaries) up.

The principle problem the way I see is that, each firm has an incentive to cheat to capture market share. If all firms in the oligopoly agree not to undercut and keep quality high with a well paid talent pool, then each firm stands to benefit. But what is practiced is to capture substantial business from the others by undercutting. It is like digging your own grave and then complaining that someone is trying to kill you! Such competition cannot be sustained through prices alone as it will lead to shrinking talent pool and therefore expanding output is also restricted. Many opponents will say ‘that’s why you need to invest in technology’ little realizing that you need money to do such investments!

What is portrayed by the media and regulators are the frauds and errors not detected – on an exception basis. These may cover say 1000 companies. What is not reported are the frauds and errors prevented or detected by good audits in the rest of the million companies in the world. This has led to many regions jumping on the band wagon to regulate the auditors. If they spent some of this time on eliminating poverty, terrorism, religious extremism or even global warming… the world would be such a better place! 

Are we on the road to discarding what is good in search of what is better? Can’t we retain what is good and then do incremental work to go from good to great? 

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About surenraj

“Views expressed are my own”
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