Modern monopolies

July 24, 2013

Bruce Buchanan once summarized Michael Porter’s strategy advice this way: “Be a monopolist when you can.” This generates mixed feelings among economists. If you create a monopoly by developing a great new product, that’s a good thing. But if you simply take over an existing market, that’s good for you but bad for the rest of us. The reasoning will be familiar to anyone who has taken an economics course or read Adam Smith

Most countries have government agencies devoted to maintaining competition, but it’s still possible to follow Porter’s advice. 60 Minutes has a nice piece about Luxottica, said to be the world’s largest “eyewear” company. Their brands include Ray-Ban and Oakley, and they produce glasses under license for Armani, Coach, Dolce & Gabbana, Polo, Prada, and many others. Their retail outlets include LensCrafters, Pearle Vision, and Sunglass Hut. They run the eyeglass counters at Sears and Target. Who wins here? Who loses?

A second example appeared in the Times on Sunday. We haven’t found anyone who could figure out what was going on from the article, but the suggestion is that financial firms have invested in commodities, and perhaps manipulated the markets to their benefit. We’ll follow up if we learn more.

Update on the second example. Stan Zin writes: “Goldman has a press release that responds to the NYT article. They claim they are custodians of aluminum that is owned by their clients. Inventories are held as a hedge against commodity derivatives (recall the basic replication for a forward contract is to buy and hold the underlying, in this case aluminum). They shuffle aluminum from warehouse to warehouse to satisfy some artificial regulation and create a longer maturity for their hedge.” See also this one, from Kim Schoenholtz. See esp the links to Izabella Kaminska’s blog posts, which are the clearest explanation we’ve seen of how this works.

Second update via John Asker (Dec 18 13):  Antitrust lawsuits moving ahead.

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