MILLBURN, N.J. (Stockpickr) -- The word "competition" is thrown around quite freely in the political and financial markets. In economic theory, competition exists along the following spectrum, from highest to lowest degree:
1. Perfect Competition
: A market in which both buyers and sellers are price takers, the number of companies is sufficiently large, there are no barriers to entry, all products are identical, and there is complete information available to all market participants. Perfect competition is an ideal condition that does not exist in real life.
2. Monopolistic Competition
: A market that has many sellers, differentiated products, multiple dimensions of competition and easy entry of new firms in the long run. For the most part, in a capitalistic society, monopolistic competition is the most likely form of market structure. For example, looking at the teen/tween/young-adult specialty retailers, the market is spread out among companies such as
Abercrombie & Fitch
American Eagle Outfitters
. Economic theorists unfortunately bewilder many students by using the term "monopolistic competition," which is often confused with the idea of monopolies.
3. Oligopolistic Competition
: Oligopolies are characterized by a small number of firms that can take into account the reaction of others and can be mutually independent or collusive, such as a cartel like OPEC, the Organization of Petroleum Exporting Countries.
: Monopolies are single-market structures that exist due to some barrier to entry. Monopolies have control over pricing, so consumers are price-takers. Monopolies can be quite profitable at the expense of the public good, which we refer to as deadweight or welfare loss. In the U.S. and in foreign nations or economic unions, there are laws and regulations that seek to block monopolistic behavior and improve competition. For example, in the U.S. we have the Sherman Antitrust Act of 1890 and Clayton Antitrust Act and the Federal Trade Commission Act, both of 1914. Famous cases of antitrust action in this country include the case against the Standard Oil Company, which was broken up;
Web browser litigation; and the break-up of the old
I firmly believe that
and as such might pose risks to investors. Let's take a closer look at some of them.
The prior litigation against Microsoft dealt with the bundling of the company's Internet Explorer browser with that of its Windows operating system. The case was finally settled by Microsoft and the Department of Justice, such that the company would share its API (application programming interface) with third-party programmers and appoint a panel of people who would have access to the company's source code and record for a period of five years.
In my opinion, this litigation fell short, and Microsoft remains at risk. The company's Windows OS is typically preloaded on most personal computers, without giving consumers the option of selecting a different operating system. Interestingly enough, Microsoft's main competition,
, will offer both its Mac operating system and Microsoft Windows on any of its computers -- for an additional charge, of course.
Microsoft currently enjoys at least a 95% market share of the personal computer operating system market. Further antitrust litigation could hurt Microsoft and help other companies such as Apple or
, which specializes in Linux open source solutions.
Wal-Mart is so big, so pervasive and so controlling that it comes as a surprise to me that the company has not already been sued on antitrust grounds for its day-to-day operations. Typically, the legal focus on Wal-Mart is over its labor policies. Those very well might deserve the attention they get, but, but there is also little doubt that Wal-Mart acts in a predatory way, lowering its prices to such an extent as to drive its competition out of business.
Wal-Mart has left a trail of failed competitors in its wake. Furthermore, the company has such a tight-fisted control over its suppliers that it forces those suppliers to act in certain ways that are detrimental to free-market competition. It can be argued that as a result of its pricing and supply policy, at least one company, Vlasic Pickles, was forced to file for bankruptcy. One day, some attorney general will get wise to Wal-Mart and sue them over anti-trust grounds.
Google, the global internet search and advertising company, has a knack for getting itself into hot water. The company got into an imbroglio with the Chinese government in the last year and withdrew from the world's largest market. Now Google finds itself engaged in a battle with European authorities.
Earlier this year, Google turned off searches for Navx, whose business Google found to be distasteful. This caused dramatic financial problems for Navx, which sells database information on French police radar traps. As a result, French anti-trust authorities took action against Google, which resulted in an order for the company to reinstate Navx advertising. Then, on Nov. 30, the European Union opened an investigation into Google's practice of lowering certain company's search rankings in a discriminatory way. It is only a matter of time until Google crosses the wrong regulator and gets hauled into a major antitrust case.
Netflix, the fast-growing video rental company, seems to have gotten itself into some potential antitrust issues with the aforementioned Wal-Mart. In
Resnick, et al. v. Walmart.com
, filed Jan. 2, 2009, according to the complaint:
"Defendants conspiracy enabled Netflix to charge its customers higher subscription prices for the rental of DVDs than it would otherwise would have. As a result of their contract, combination and conspiracy as well as Netflix's unlawfully acquired and maintained market and monopoly power, Netflix actually did overcharge Plaintiffs, and millions of other consumers similarly situated, and continues to do so."
After this filing was made in California, similar suits were filed across the country in other states. While Wal-Mart settled the California case in August 2010, Netflix is still defending its case in court. The lawsuits in other states are still pending.
Netflix is in a battle with
to control and capture the DVD and video-streaming rental markets. Blockbuster, another video rental competitor, recently filed for bankruptcy. Whether an oligopoly or monopoly, Netflix could face legal risks in the future.
-- Written by Scott Rothbort in Millburn, N.J.
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At the time of publication, Rothbort was long AAPL stock and calls and CSTR stock, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
, an educational social networking site; and, publisher of
. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
TheStreet.com's RealMoney Silver
website and has frequently appeared as a professional guest on
Fox Business Network
and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.