"Marketing says we gotta merchandise ... But the economy says we gotta minimize." — from "Think Visual" as performed by The Kinks
A client recently shared a book with me, co-authored by his niece, Denise Hearn, which is titled "The Myth of Capitalism: Monopolies and the Death of Competition." He suggested it might make an interesting column. It was a fascinating read.
The book's theme is that the American economy has evolved into "capitalism without competition," and that monopolies, duopolies and oligopolies dominate the marketplace. Dozens of products and services, from dairy products to railroads, are controlled by monopolies; payment systems, beer distributors, smartphone operating systems and more are offered to the public predominantly as duopolies; and credit reporting bureaus, airlines, wireless carriers, banks, health insurance, medical care, big agriculture and national media outlets are considered oligopolies.
Our current dilemma mirrors the early 20th century, when, following the passage of the Sherman Anti-Trust Act of 1890, President Theodore Roosevelt and government lawyers attempted to prevent mergers that created monopolies. Roosevelt was successful in 1904 in breaking up the Northern Securities Company, a railroad trust controlled by J. P. Morgan. The government attempted but failed to rein in U.S. Steel, which was formed by Morgan merging the three largest steel companies in the U.S.
That today so many vital products and services are offered by so few providers translates to enhanced pricing power by these companies, just as it did in the late 19th century. This concentration of services also equates to less choice and frequently, diminished service levels.
The issue of whether to regulate existing companies, block mergers between large ones, and to "challenge the existence of monopoly fortress hubs" will likely be a source of intense political and economic debate in coming years. A relative few corporations are so powerful that their "stock buybacks...are a symptom of little competition and abnormally high profits," according to Hearn and co-author Jonathan Tepper.
Naturally, investors are drawn to those companies which enjoy what Warren Buffett calls a protective moat surrounding their products and services. The big question for investors is, of course, whether or not this low-competition, high-profit environment will endure. Profit margins were relatively cyclical a few decades ago, ebbing and flowing through economic expansions and contractions, but that trend seems to have faded a bit in recent years.
It’s possible that the tide will turn against the oligopolies, but it doesn’t seem likely any time soon. People must have certain services to survive and enjoy a high quality of life. None of us want to live without essentials like healthcare and or without entertainment options like cable and internet. Thus, it behooves the 50 percent of the population who own stocks to invest in companies which thrive without much competition.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.