Everyone in a capitalist economy wants more competition, right?
After all, in a State-driven top-down system, prices may be set by a central authority.
And under some communist ideologies you might not have prices at all – you get what you’re given, via quotas.
But we rely on market forces to best deliver the goods and services we need.
Indeed those alternatives to capitalism fell from favour mostly because they don’t work.
China pulled its people out of poverty not by edict but by unleashing competition.
After all, in a State-driven top-down system, prices may be set by a central authority.
And under some communist ideologies you might not have prices at all – you get what you’re given, via quotas.
But we rely on market forces to best deliver the goods and services we need.
Indeed those alternatives to capitalism fell from favour mostly because they don’t work.
China pulled its people out of poverty not by edict but by unleashing competition.
For the greater good
There is a concern though that today’s late-stage capitalism might be breaking down.
That the rich are getting richer by hoarding the spoils, and that companies who’ve won the game are locking out newcomers and reaping more market share at the expense of us consumers who rely on competition to drive prices lower.
Personally, I see little evidence of the second part of this concern.
Some of the biggest drivers of competition around – Amazon, Facebook, Uber, Deliveroo – were mere glints in their aspirational founders’ eyes just a generation ago.
So it seems to me that competition is alive and well.
However not everyone agrees.
Andrew Tyrie, the newish head of the UK’s Competition and Markets Authority (CMA), says that the market share of Britain’s largest 100 companies has increased from 21% to 28% over the past 20 years.
Tyrie also points to the proliferation of practices such as penalties for loyal customers in financial services, telecoms, and insurance as inherently anticompetitive.
The government seems to agree, as Business Secretary Andrea Leadsom and now ex-Chancellor Sajid Javid ordered Tyrie’s body to conduct an annual review into the effectiveness of competition in the UK, and to provide evidence where it’s failing.
Hitting the anti-competitive jackpot
This could potentially cause a problem for more than any anti-competitive companies who’ve been pursing their hands and snickering over the outlandish profits they’ve been making by ripping off consumers.
And that’s the investors who own them!
I said early on, we all love competition. Ultimately even equity investors need the forces of competition and disruption to keep capitalism on its toes and our businesses striving.
But when it comes to the individual stocks we own, well, for as long as it lasts there’s nothing like owning a profitable monopoly…
If you have a company that can hike prices and continue to sell even more of its goods or services without fear of a competitor stealing its business, you’re sitting on a gold mine.
So an investigation into competition could be the stuff of investors’ nightmares.
Indeed I’ve heard some comments to that effect already. Could today’s more populist politicians be ready to slay a few golden geese?
Competitive to the bone
I have my doubts.
Firstly, as I said I’m not convinced there’s a lack of competition in the UK.
Partly this is an ‘eye of the beholder’ issue. You or Andrew Tyrie might see special offers reserved for new customers or sneaky unexpected charges as signals that an anti-competitive bully is exploiting its poor benighted customers.
But while that does happen, I usually see rather a company with little pricing power trying to make up for its weak profits some other way.
It might not be pretty, but it may reflect great competition, rather than none.
These companies can’t straightforwardly raise prices, because the competition is too strong to allow it. The alternative ways they find to bring in revenue aren’t the icing on an anti-competitive cake – in this cutthroat world they are the cake!
Banks are a good example. We have free banking in the UK and it’s now trivial to switch. At the same time low rates and greater regulation have crushed the returns from traditional banking – and there are a host of unprofitable fintech start-ups backed by VCs who don’t need to see a return today nibbling away at their customer bases.
So sure, banks might be tactical about which customers they offer better rates to. But that’s because they’re in a position of weakness, I’d argue, rather than strength.
Or consider the trains. Many would argue high ticket prices shows they’re exploiting an anti-competitive market position.
But do the long-term profits of their owners? Hardly.
Moat or monopoly?
Where things get even more interesting is with Internet platforms like Rightmove, Hargreaves Lansdown, or Auto Trader.
It seems clear network effects are seemingly locking some of these into dominant positions. Scale enables extremely cost-effective returns on investment and high margins due to the trivial cost of servicing new customers. These businesses are now very difficult to compete with.
But are they really anti-competitive predators? Or have they earned their position by seeing an opportunity, investing to capture it, and developing what Warren Buffett calls an economic moat?
Before you answer that, consider too that while these companies may look unassailable, that’s seldom proved to be true in previous instances.
Think about the UK supermarket sector. A decade or so ago the giant grocers appeared to own their consumers, due to few available sites for rival stores and tremendous buying power enabling them to squeeze suppliers.
A company such as Tesco would have topped many people’s lists of firms to be worried about competition-wise in the early 2000s. Yet since then its shares have cratered, due to incursions from leaner outfits Aldi and Lidl at one end, and Internet retail stealing sales of juicy fodder such as flatscreen TVs and clothing at the other.
Tesco has regained its footing, but nobody would call it invulnerable to competition.
I suspect that will prove true of all but a few minor instances investigated by the CMA.
