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~100X pricing power difference between 3 vs. 4 oligopolists


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Posted (edited)

Sometimes, as investors, we might underestimate the difference in pricing power between 3 vs. 4 oligopolists in a market, especially if one of the competitors is a government owned/influenced enterprise that is motivated by more than just profit-seeking, e.g. full employment, low prices, increased competition, etc. 

For example, I came across mobile data pricing across the world, and found the price to be almost 100X per GB between a market that has 3 providers with a wink-wink relationship between providers vs. 4 providers where one of the providers is a government owned entity : 

  • $12.55/GB in Canada with 3 providers that had over 82% market share:
    • Bell
    • Rogers
    • Telus
  • $8/GB in U.S. with 3 providers:
    • AT&T: 44.5% market share
    • VZ: 29.5%
    • TMUS: 24.9%
    • U.S. Cellular: 1.2%
  • $0.09/GB in India with 4 providers, where 1 is govt:
    • Reliance Jio: 35.30 market share
    • Bharti Airtel: 29.62%
    • Vodafone Vi: 24.58%
    • State-run BNSL: 10.21%

There are other factors at play here also, but the number of oligopolists and whether there is government owned/influenced entity at play makes a big difference. Source: https://www.visualcapitalist.com/cost-of-mobile-data-worldwide/

Even with as low as 2 oligopolists, where one of the oligopolists is a government owned/influenced entity like Airbus, profits can stay low for both Airbus and Boeing. 

In the U.S., as investors, we are blessed with antitrust asleep at wheel so far. 

China seems to be taking a different approach where they want more competition.  In perfect competition, economic profits would go to zero. I'm not saying China would go that far, but on a spectrum that has perfect monopolies on the left and perfect competition on the right, China definitely wants to be on the right side of the U.S. on the spectrum for private enterprises.   It will do amazing things for its economy at the expense of lower returns for investors.  So, we need to be careful as investors to pay attention to the competitive and regulatory landscape. 

 

 

 

Edited by LearningMachine
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I don’t think that 3 vs 4 competitors matter necessarily. There is  dependency in each industry that determines he amount of competition probably just as much than the current structure.

In the US, consumers are used to pay a lot of money for media and communication compared to Europe, where TV and Radio for example pretty much started out free  ( or most free) so new competitors also had to start free ( financed with ads only) Once that is set, it is really hard to charge a lot of money and takes a lot of time.

Just look at Malone, his success were all mainly in the US ( TCI, Charter, Sirius) and all the international business are relative failures ( LILA, Liberty Media). I don‘t think it’s just management, those other market ex US are just more competitive and hence less profitable.

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Posted (edited)
On 5/28/2021 at 5:34 PM, Spekulatius said:

I don’t think that 3 vs 4 competitors matter necessarily. There is  dependency in each industry that determines he amount of competition probably just as much than the current structure.

In the US, consumers are used to pay a lot of money for media and communication compared to Europe, where TV and Radio for example pretty much started out free  ( or most free) so new competitors also had to start free ( financed with ads only) Once that is set, it is really hard to charge a lot of money and takes a lot of time.

Just look at Malone, his success were all mainly in the US ( TCI, Charter, Sirius) and all the international business are relative failures ( LILA, Liberty Media). I don‘t think it’s just management, those other market ex US are just more competitive and hence less profitable.

@Spekulatius, you're right, it is not necessarily the number of competitors. I agree there is more to it. 

Number of competitors is only one of the factors in whether the industry ends up developing competition or "clubby" behavior.  Yes, it is easier to develop clubby behavior when there are fewer players, but there is more to it. 

image.png.91a36d413fc10cbce407dad5d74d6d75.png  

Source: https://www.visualcapitalist.com/cost-of-mobile-data-worldwide/

 

Another factor in development of "clubby" behavior might be whether the product can be differentiated & market can be divided between competitors along some dimensions, e.g. geographical area for the cable providers, and income-levels/network-quality-image/bundles for the three wireless providers in the U.S..

 

Turns out there is a video that talks about the spectrum from perfect-competition to monopoly, and that perfect-competition leads to zero economic profits in the long run, similar to what I mentioned above, except that it has the sides of the spectrum reversed: 

 

Edited by LearningMachine
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