Competition is about more than numbers

It has become increasingly common of late for oligopoly to be cited as the key explanation for high consumer prices in Iceland. When few companies operate in a market, it is often inferred that competition is weak and that consumers bear the cost. That is an oversimplification.

This simplistic framing appears in two recently published discussion papers from the Icelandic Competition Authority on pricing in the groceries and fuel markets. The occasion was a special additional allocation from the Minister of Industries to strengthen oversight of grocery prices, and the Authority's role in monitoring whether the reduction in VAT on fuel was passed on to consumers. Both papers point out that oligopoly characterises these markets and give it considerable weight as an explanation for high prices.

Oligopoly simply means that few companies operate in a given market. It says nothing, however, about whether those companies collude, abuse their position, or fail to compete hard for customers.

Economies of scale set the limits

It is important to distinguish between oligopoly and a lack of competition. The OECD has pointed out, among other things, that concentration is only one measure in assessing competition. It is equally important to look at price developments, margins, innovation, the scope for new companies to establish themselves, and the conduct of companies in the market.

In many industries it is natural that few companies operate. The reason lies chiefly in the cost structure of the sector concerned rather than in a lack of competition. Where fixed costs are high and substantial investment is needed to build infrastructure, the cost per unit falls as more customers are served. It can then be more efficient for a few companies to run large, well-utilised systems than for many smaller companies to build comparable infrastructure alongside one another.

More operators generally mean more systems, higher administrative costs, poorer utilisation of expensive operating assets, and weaker scope to invest in better service, a broader product range, and innovation. Those costs do not disappear. They end up ultimately in higher prices for consumers or in poorer service.

The objective of those who have consumers' interests at heart should therefore not be to maximise the number of operators, but to maximise consumer benefit.

A common market structure in larger countries

Oligopoly is, moreover, not a uniquely Icelandic phenomenon. It is common in many capital-intensive industries around the world, where economies of scale largely determine how markets are organised. The small size of the Icelandic economy makes this market structure more visible, but does not change the fact that it is common in many countries abroad. What matters most, therefore, is not how many companies operate in the market but whether competition between them is sufficiently effective.

On the other hand, competition can be weak if new entrants find it difficult to enter a market, if rules protect incumbent companies, or if imports are restricted. Competition law should therefore be directed first and foremost at conduct that harms competition — such as price collusion or abuse of a dominant position — and not at whether or how companies achieve reasonable economies of scale.

The state is part of the problem

When high prices are explained by oligopoly alone, it is all the more important that the authorities look to what they themselves control. Tariffs on food, excise duties on cars, complex licensing systems, burdensome rules, and other trade barriers raise costs and can reduce competition from imports or from new companies. These factors can also strengthen the position of those already in the market.

This matters particularly in a small market. Imports and the possibility of new market entry can be the most powerful source of competitive pressure, even where few companies operate domestically. When the authorities raise the cost of importing or make it hard for new entrants to establish themselves, they risk perpetuating the very market structure they later criticise.

Effective competition is the objective

Oligopoly is thus neither a self-evident explanation for high prices nor a universal sign of weak competition. Whether that is the case depends on how the market actually functions. The objective should be effective competition that delivers lower prices, better service, and greater choice to consumers.

That requires robust oversight of collusion and abuse of market position, but no less so authorities that reduce tariffs, barriers to entry, and burdensome regulation that protects incumbents at the expense of new competitors. That is how real gains are achieved for consumers and for society as a whole.

Lísbet Sigurðardóttir, legal counsel at the Iceland Chamber of Commerce

The article was first published in Morgunblaðið on Thursday 9 July 2026.

This article was automatically translated from the Icelandic original.