"Kee" Points with Jim Kee, Ph.D.

  • Market Valuations
  • Today’s Monopolies versus Old School Monopolies
  • Economists on the Question of Monopoly

Market Valuations

Stocks (US) started the year strong, rising almost 10% into late January before a sell-off that lasted through March. Then they bounced up and down for a while (this is all pretty typical midterm election-year stock market behavior). But last week US stocks finished at all- time highs, even though the market’s valuation level as measured by the price-to-earnings (P/E) ratio is well below its January peak. That is because earnings have been so strong, which is the denominator of that ratio. The P/E ratio hit 18.5 in January, meaning stock prices were “eighteen and a half times earnings,” but is currently at 17, because prices have not risen as much as earnings have risen (i.e. the numerator didn’t increase as much as the denominator). In other words, stocks were more expensive in January than they are today.

Today’s Monopolies versus Old School Monopolies

A recent Wall Street Journal article caught my eye, “The Antitrust Case Against Facebook, Google, and Amazon.” The article compared market shares of new “monopolies” with those of monopolies of old, and it is pretty interesting stuff. For example, Amazon has about 75% of the electronic books market and about 44% of online commerce. Apple has about 54% of mobile operating systems. Google has 42% of online advertising revenues. By comparison, in 1896 General Electric had 75% of the electric lamp market; by 1904 Standard Oil had 87% of the market for refined oil products; AT&T processed 93% of phone calls in the 1930s, and by 1971 Xerox had 86% of photocopier sales and leases.

Economists on the Question of Monopoly 

The question of how much market share is too much has a long and conflicted past in economics, and a lot of it centers around the appropriate definition of what constitutes monopoly power, as opposed to competition (which is why the word “monopolies” above is in quotations). Some economists view an industry dominated by one or a few firms as monopolistic, and implicit in this view is the notion that the market has been cornered by a single firm, usually by restricting entry of new competitors through nefarious means. That should lead to more pricing power, or higher prices than would otherwise be the case. But others, most notably economist Harold Demsetz at UCLA (circa 1973) advance an “efficiency” explanation which argues that, in a world that is truly competitive, the best should take share from the worst, which leads to a handful of dominant firms in each industry. So one view sees a few dominant firms as indicative of a lack of competition, while another sees it as the logical outcome of competition.

Does Facebook have a monopoly? The share of social media account holders with a Facebook account in 2017 was 94%, so it would appear so. But what did people do before Facebook? They networked and kept in touch by making phone calls and writing letters or emails, which is still an option open to all but is much less efficient. And driving to the mall to shop is also still an option instead of using Amazon, and landlines can be chosen instead of an Apple iPhone. And as for Netflix, you can still do the alternative, which is to buy a TV Guide (it still exists) and hope one of your favorite shows gets programmed. And of course instead of using Google as a search engine you can drive to the library and use the card catalog, if your library still has one! (most are in historic small town libraries). All of these firms have dominant market shares and could be considered monopolies or near-monopolies, and yet all of them are more efficient (lower cost to the customer) than what they displaced.