Title: The Impact of Concentrated Markets on Fair Competition and Returns for Shareholders
Introduction:
Concentration in markets can be a cause for concern among antitrust regulators aiming to prevent restrictive agreements that hinder fair market competition and excessive market concentration. While concentrated markets are not uncommon, certain protections like patent and trademark laws can strengthen the influence of dominant companies. Additionally, high capital costs often create barriers to entry for new competitors. Nevertheless, the existence of global duopolies, such as Boeing and Airbus in the commercial aviation industry, demonstrates that market power does not always result in outsized profits or high returns for shareholders.
The Commercial Aviation Market and Lessons on Concentration:
The commercial aviation market offers insights into the impact of market power on profitability. Airbus and Boeing, the two major players in this industry, typically split most of the global jet orders evenly. However, their dominance has resulted in a more concentrated market. This is evident from Boeing’s successful efforts to prevent Bombardier, a Canadian jet maker, from competing in the narrow-body airliners segment. Backed by the US Department of Commerce, Boeing undermined Bombardier’s attempts to sell its planes in the US market, leading to significant financial challenges for Bombardier. Eventually, Airbus purchased Bombardier’s aircraft design, rebranding it as the A220-series. The acceptance of this deal by competition authorities raises questions about their effectiveness in curbing market concentration.
Factors Influencing the Duopoly in the Commercial Aviation Industry:
The duopoly status of Boeing and Airbus in the commercial aviation industry is not solely dependent on government support and lobbying efforts. Deep expertise and substantial investments create a moat around these companies, making it difficult for potential competitors to enter the market. Geopolitical factors also play a role, with Embraer from Brazil and Comac backed by the Chinese state attempting to establish a stronger global market presence. Despite their efforts, the concentration of market power does not always translate into positive outcomes for shareholders.
Lower Returns in Concentrated Industries:
Research conducted by finance academics Kewei Hou and David Robinson in 2006 demonstrates that concentrated industries tend to yield lower returns. Among the least concentrated industries, the annual returns were found to be 4 percent higher compared to the most concentrated industries. This suggests that high barriers to entry not only reduce the risk of share price decline but also result in lower earnings. A lack of competition limits firms’ appetite for risk-taking and innovation, which can negatively impact shareholder returns.
The Microsoft/Activision Blizzard Case: An Example of Regulatory Concerns:
Regulators in the US and UK have recently expressed concerns about Microsoft’s acquisition of gaming software maker Activision Blizzard. The Fair Trade Commission in the US and the UK’s Competition and Markets Authority fear that this acquisition will further strengthen Microsoft’s pricing power in the gaming industry. The FTC believes that Microsoft may leverage Activision’s gaming portfolio to limit competition and promote its Xbox console hardware. However, both companies argue that gaming is shifting towards mobile devices, which remains a fragmented and competitive market.
The Potential Impact of the Microsoft/Activision Blizzard Deal:
The legal battle surrounding the Microsoft/Activision Blizzard deal raises questions about its potential outcomes and implications. If the acquisition is voided, Microsoft may have to pay a significant reverse termination penalty. While the parties involved remain committed to completing the deal, the complexity and time-consuming nature of the process, coupled with regulatory challenges, can create uncertainties. The outcome of this case will have broader implications on industry consolidation and the power dynamics within the gaming market.
Insights and Perspectives on Market Concentration:
Market concentration can have both positive and negative effects on companies, shareholders, and competition. While dominant companies may enjoy certain advantages, such as pricing power and market control, their profitability is not guaranteed. In some cases, excessive market concentration can lead to underinvestment and hinder innovation, ultimately impacting shareholder returns.
Conclusion:
The presence of concentrated markets raises concerns among antitrust regulators aiming to preserve fair competition. While certain protections and high capital costs can contribute to market concentration, this does not always translate into outsized profits or high returns for shareholders. The commercial aviation industry and the Microsoft/Activision Blizzard case demonstrate the complexities associated with concentrated markets. Investors and regulators should remain vigilant to ensure that market concentration does not stifle competition or hinder innovation, ultimately benefiting shareholders and consumers.
Summary:
Market concentration is a persistent challenge for antitrust regulators seeking to prevent restrictive agreements and excessive market dominance. Concentrated markets, although not uncommon, do not always guarantee outsized profits or high returns for shareholders. The commercial aviation industry serves as an example, where Boeing and Airbus control the majority of the global jet market. While their dominance has resulted in a concentrated market, it does not necessarily translate into significant profitability or positive outcomes for shareholders.
In the Microsoft/Activision Blizzard case, regulators express concerns about the potential acquisition, fearing that it could strengthen Microsoft’s pricing power in the gaming industry. The outcome of this case will have broader implications for industry consolidation and power dynamics within the gaming market.
Research has shown that concentrated industries tend to yield lower returns compared to less concentrated industries. High barriers to entry limit risk-taking and innovation, impacting shareholder returns negatively. As such, investors should closely monitor market concentration and its impact on competition and shareholder value.
Regulatory efforts should complement market dynamics to ensure fair competition and innovation. Antitrust regulators play a vital role in preserving competition and preventing market concentration from hindering fair market practices. By striking a balance between protecting consumer interests and encouraging innovation, regulators can create an environment that fosters competition while supporting shareholder value.
Overall, market concentration necessitates close attention to both its benefits and potential drawbacks. Companies, regulators, and investors must consider the long-term implications of market dominance to ensure a healthy and competitive marketplace.
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Antitrust regulators aim to prevent restrictive agreements between companies that prevent fair market competition and excessive market concentration.
Despite their concerns, concentrated markets are not unusual. Indeed, some typical protections, such as patent and trademark laws, can strengthen the power of dominant companies. In other cases, the barrier to entry is high capital costs.
Global duopolies, in which only two participants control the delivery of a particular good or service, exist in some industries such as aerospace, where most of the world’s largest commercial jets are manufactured by Boeing in the United States and by Airbus in Europe.
However, market power does not necessarily translate into outsized profits, nor high returns for shareholders. A closer look at the commercial aviation market offers lessons on this point.
The European Airbus market updated this week on its 20-year forecast for global jet demand, increasing it to 40,850, about 3% higher than last year’s forecast. If past history offers any guide, Airbus and Boeing should split much of these orders evenly.
The commercial jet market became even more concentrated during that time. Boeing and Airbus managed to prevent Bomber compete in narrow-body airliners. The Canadian jet maker had pushed into its bigger cousins’ territory with its C-series of aircraft during the 2000s.
Backed by the US Department of Commerce, in 2017 Boeing managed to derail Bombardier’s efforts to sell in the US, the largest market for the planes. Its use of a dominant market position nearly led to financial ruin for Bombardier. The C-series design was eventually purchased by Airbus and has since been rebranded as the A220-series. Competition authorities have just blinked at the deal.
Government financial support and lobbying efforts underpin the duopoly’s stance in airliners. But also the deep expertise and large investment requirements create a moat that protects both companies.
Geopolitics is important in aircraft manufacturing. Both Brazilian manufacturer embeda distant third place globally and backed by the Chinese state Comac have a strong domestic market share. Both aspire to build their global market share.
Market power doesn’t necessarily mean good news for shareholders. 2006 research by finance academics Kewei Hou and David Robinson found the exact opposite. A lack of competition reduces a firm’s appetite for risk-taking: High barriers to entry translate into lower risk of a share price downside, but can also lead to lower earnings. There was some evidence of this at Boeing, which appears to have underinvested, leading to bigger problems later on.
Returns tend to be lower. Among the least concentrated industries, annual returns were 4 percent higher than among the most concentrated, according to the research.
All of this suggests that investors can understand when innovation is at risk due to excessive market share concentration. Antitrust regulation should complement this market effect.
Microsoft/Activision Blizzard: Devil’s Work
Watchdogs are often wary of dominant companies and their pricing power. Witness the recent efforts by regulators in the US and UK to block Microsoft’s acquisition of gaming software maker Activision Blizzard.
Both the Fair Trade Commission in the US and the UK’s Competition and Markets Authority fear that Microsoft, maker of consoles and Xbox games, will only gain more pricing power by acquiring the maker of some best-selling games.
The FTC’s theory is that Microsoft will use Activision’s gaming portfolio to force consumers into less competitive XBox console hardware. The two companies say the game is, however, migrating to mobile devices. This remains a fragmented and competitive area.
Activision Blizzard recently said that in the first few days after its release, the Diablo IV video game grossed $666 million. He described that suitably occult figure as “auspicious.”
On the same day, the US FTC went to court in a bid to stop the major video game maker from closing its $75 billion deal to sell itself to Microsoft. The agency had previously sued to stop the tie-up. But without an injunction, the companies could run the risk of completing the combination.
Microsoft described that regulator action as its own fluke. The software titan believes he can pursue his lawsuit sooner and that he will prevail in court. Activision and Microsoft are committed to the deal as the merger agreements require their “best” efforts to complete. But both sides won’t be too divided, so to speak, if the government forces them to break up.
When the deal was struck 17 months ago, Activision was reeling from a corporate governance and culture scandal. Since then, the collective sense of shame has subsided. At the same time, Activision’s standalone prospects have increased.
Following the announcement of the deal, analyst consensus earnings estimates for 2023 bottomed out at just over $3 per share. That figure has now risen to about $4 a share on the strength of Diablo and other games.
As for Microsoft, its shares are up 40% since the start of 2023. Its software machine seems unstoppable. He’s riding a wave of hype around generative AI.
If the deal were to be voided, Microsoft would have to pay a $3 billion reverse termination penalty, though the parties could negotiate something less if they were ready to move forward. Closing the acquisition looks complex and time consuming, at the very least, considering there is a legal battle going on in the US and the UK has blocked the deal.
Wall Street and corporate America will silently pray that the two companies keep fighting. A victory would chastise a Biden regime that has fought industry consolidation. But the partners may lack the devilry to persist no matter how hellishly Activision spins its game releases.
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https://www.ft.com/content/432bc077-7d20-4772-80ce-254305cd3b2d
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