Nov

20

Nicky BarnesIn an interview in New York Magazine, the two leading CEOs of business in Harlem in the 1970s, Frank Lucas and Nicky Barnes, both depicted in American Gangster and Mr. Untouchable, discuss the merits and demerits of duopoly. They both welcomed the other's competition as it provided information efficiencies to the customers. Wikipedia has a nice article on duopoly where they list some examples of major stock market companies involved in duopoly, Moody's and S&P, Pepsi vs Coca-Cola, Airbus vs Boeing, Sotheby's vs Christie's, Sirius vs XM. I would add a favorite of mine Navteq and Teleatlas in navigation systems maps

I am creating a list of duopolies in the stock market based on their stock market value in an industry. A preliminary hypothesis is that the two duopolists perform better than the average company since they face less competition. I wish I had formulated this hypothesis some years ago as I once was a very substantial holder of Navteq and in true duopoly fashion both their outputs are being bought by competitors after bidding wars.

Steve Ellison adds:

Many market segments in the technology sector are near-monopolies, for example operating systems (Microsoft) and microprocessors (Intel). As Geoffrey Moore has documented, it is very common for a technology market segment to have an "800-pound gorilla" with 40-70% market share, followed by a "chimpanzee" with 15-25% market share and several "monkeys" with less than 10% market share. In enterprise resource planning software, for example, SAP is the 800-pound gorilla, and Oracle is the chimpanzee. In large corporate databases, Oracle is the 800-pound gorilla, and Microsoft is the chimpanzee.

Such quasi-monopolies occur because of the herdlike behavior of corporate information systems managers. These managers are very cautious and want only proven solutions whose bugs have already been discovered by others and corrected. A common statement in decades past was, "Nobody ever got fired for buying IBM." When these managers feel compelled to buy a product in a new technology category, they watch what their peers are doing. Most who notice other managers flocking to a particular vendor select the same vendor.

As this dynamic continues, the entire support structure of the industry, including consultants, solutions aggregators, and independent software vendors, aligns around the 800-pound gorilla's product. As a result, the gorilla has high profit margins. Chimpanzees and monkeys have much lower profit margins because they lack the gorilla's advantages and in some cases have no way to differentiate their products other than lowering prices.

Other 800-pound gorillas include:
- Cisco Systems (network equipment)
- Applied Materials (semiconductor manufacturing equipment)
- EMC (large storage systems)
- Nokia (cell phones)
- Google (search engines)
- eBay (online auctions)
- Qualcomm (wireless chips and licensing technology)

Bruno Ombreux remarks:

One way to measure competitive pressure or its lack thereof is the Herfindhal index. Stock perfomance vs Herfindhal index has been looked at before. A Google on "Herfindahl index and cross-section stock returns" yields 15000+ pages.


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