How to become and remain to be an oligopoly firm
Columbia Encyclopedia, fifth edition, and "Tired of Each Other," Time, June 4, 2001
Oligopoly is a form of market, which is dominated by a few large firms producing basically similar products. In the United States, oligopolies occur in several industries. For example, four firms supply 94% of total demand in refrigerators and freezers, 90% in cigarettes, 86% in cereal breakfast, 84% in greeting cards, 77% in beers, and 66% in tires.
To understand how firms become and remain dominant, consider the examples of Ford Motor and Firestone Tire companies. Henry Ford was born the son of a farmer in 1863. From his childhood, he demonstrated a keen mechanical aptitude, especially in power-driven engines, and worked as a machinist at the Edison Company. During his spare time, he worked on building a car and completed his first automobile in 1896. In 1903, with several partners, he organized Ford Motor Company. By introducing the conveyer belt and assembly line production technique to produce a standardized Model T automobile in 1908, Ford was able to cut costs significantly below his competitors and became the largest car producer in the world with a record 15 million in sales of the Model T car. Thus, Ford became a dominant firm by developing an innovative mass production technique, which enabled a significant cost reduction in a competitive market.
Harvey Firestone, born in 1868, five years after Ford, was the son of a prosperous farmer. Sensing a large business potential in automobile tires, he leased one million acres of land in Liberia to start a rubber plantation. In 1900, he established Firestone Tire and Rubber Company and became the leading manufacture of automobile tires. Firestone became a dominant firm by controlling the essential raw material.
Automobiles and tires are complementary goods, and the two companies might have merged, either through a friendly purchase or hostile takeover, into one company (i.e., a conglomerate merger). Or Ford Company could have simply started its own tire company or purchased a smaller tire company other than the dominant Firestone (i.e., a vertical merger). However, Mr. Ford and Mr. Firestone each liked the other's pioneering entrepreneurship and became good friends, frequently going camping together. Under this personal friendship, Ford made Firestone major supplier of tires for its cars. It is quite possible that the two men made important corporate decisions during their camping trips, as important business decisions are frequently made informally during golf games by company executives nowadays.
In 1947, the close relationship between the two companies was further enhanced by a marriage between them. Martha Firestone, granddaughter of Harvey Firestone, and William Ford, grandson of Henry Ford, were wed, and their son, Bill Ford Jr., is the current chairman of Ford. Thus, Bill Jr. inherited the legacy, as well as the business interests, of both Ford and Firestone. This match might have been purely out of love. Yet, it is a rather frequent occurrence that large firms attempt to maintain their dominant positions through a marriage between family members of the firms, thus effectively eliminating potential competition from outsiders.
The relationship between the Ford and Firestone companies remained very amicable until June 2001, when the two companies blamed each other for frequent, often fatal, accidents involving the Ford Explorer car mounted with Firestone tires. The relationship between the two companies grew bitter, and Ford Company abruptly announced the discontinuation of Firestone tires on Ford cars, thus terminating 95 years of a friendly and mutually very beneficial business relationship. This decision must have been very agonizing to the chairman of Ford, because in a sense he had to take the side of his father against his mother.
However, in modern corporate structures, large firms are owned partially by the public through its stock holdings. Both the Ford and Firestone families own the major shares of their respective stocks, and the prosperity of their stocks are their primary concern both for their own wealth and to appease public stock holders. Therefore, family or personal relationships may assume the secondary importance in this highly competitive economy. In fact, a decline of nepotism is a sign of a healthy and progressive economy.