Celebrating Cynics – Monopolies aren’t good. So why have we encouraged their formation?

We introduced our “celebrating cynics” series the other day by making an appeal for procurement people to become – well, maybe not too cynical, but at least worldly-wise when assessing the situations that face us in our jobs and the markets we deal with. So we promised some follow up and today let’s start with monopolies.

And the first key point is this - isn’t it wrong that only one company makes the Monopoly board game? Not my joke, but from Steven Wright, the US comedian. Well, I thought it was funny anyway.

A monopoly is a situation in which a company or organisation is the only supplier of a particular item. A firm that controls a market can in the extreme, set prices however it wants. It will generally do that to maximise income (if it prices too highly, no-one will buy, unless it is a fundamental essential of life). But the price charged will always be higher than that generated by a free and true market.

So a monopoly exploits customers, charging an amount that maximises their own return rather than being driven by any competitive pressures on market price or indeed performance. An oligopoly is almost as bad - a small number of organisations controlling a market in a similar manner. But you knew that already.

Unlike cartels (subject of another post to come), monopolies are usually easy to spot for the buyer. It tends to be obvious when there is only one firm from which we can buy a particular item. why is it such bad news for buyers? Because, as well as the tendency to charge prices that are higher than a true market rate, it is rare to find a monopoly that cares too much about innovation, or great customer service, or continuous improvement, or all the other things we’d love to see in our supply base.

So if all that is pretty obvious, and if procurement hates monopolies and oligopolies so much, why has our profession done so much to encourage them over the last 30 years?

  • We’ve aggressively aggregated spend through category management programmes until only the largest suppliers (those most likely to achieve monopoly positions) can meet our needs.
  • We’ve set tighter and tighter specifications (directly or through indirect requirements such as ISO accreditation, security constraints and the like) until again only a few firms can meet our standards.
  • We’ve grouped together pretty disparate bundles of services into a "full service IT outsourcing" or "total facilities management" contract – a contract that now few firms can possibly handle.
  • We’ve made tendering processes long, expensive and complicated to weed out the small, new or less experienced firms, whilst favouring the big boys.
  • Even in our own world, we’ve signed up to mega-organisation-wide ERP systems, without any clear route for exit or change of supplier, and forced our own suppliers to sign up to monopoly ‘supplier networks’.

This all creates barriers to entry and promotes oligopoly / monopoly situations. So perhaps we should be a little more cynical. Realise and understand that businesses desire to create monopolies so that they can exploit the buyers of their products. Monopolies allow suppliers to make super-profits, they take away much of the need for firms to become more efficient or to innovate, and those profits tend to generate huge salaries and bonuses for the owners and managers of those firms. Be cynical about that.

An attitude of constant, weary cynicism would make life unbearable, I suspect, so we wouldn't really wish it to that degree on the procurement profession. But it is important for procurement people to look hard and to understand what drives suppliers and markets.

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Voices (5)

  1. Paul Smith:

    The strategy of creating monopoly suppliers in search of cost reduction
    is flawed thinking.
    Maybe those days are coming to an end:

  2. PSZZZ:

    NHS Supply Chain – the largest monopoly wholesaler of commodities created by the DoH for the NHS.
    What a nice gift!

  3. Derek Lancaster:

    Interesting – of course without critical mass supplier networks are pointless,, just as there was no point having both VHS and Betamax

  4. b+t:

    What’s measured gets rewarded.

    And the easily measurable gets measured.

    How would you score ‘nipping a monopoly in the bud’ for a tender or a buyers performance review ?

  5. Dan:

    My favourite Steven Wright joke: The early bird may get the worm, but its the second mouse that gets the cheese.

    In terms of monopolies, I think that buyers tend to encourage them as in the short term it makes life easier. Only one contractor to manage? Great.

    Of course, this will cause major problems later on, but by this point the procurement person will have moved on and the problem is someone else’s.

    Cynical enough for you?

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