Four firms control 98% of the cell phone market, four companies have cornered 92% of the peanut butter market, four airlines hold 73% of their industry market share, and three firms make up 89% of the social networking industry.¹ There’s similar concentration across a wide variety of industries, from pet food to pharmacies to beer. What does it mean when industries become this concentrated, dominated by a few giants?

The federal government stopped collecting data on corporate concentration in 1981, but the Open Markets Institute has recently published data collected from a team of analysts called IBISWorld. It’s tricky data to manage; whereas it may seem as if there is a wide variety of consumer choices with multiple and various brands, a number of those brands are often controlled by a single parent organization. The data from IBISWorld allows us to see the reality hiding below the surface.

The Open Markets Institute Report looks at a wide range of industries, identifying the revenue share of the top corporations in each and comparing that with historical data. The results are quite startling, with most industries having a few huge players at the top. “This report shows that such concentration is not unique to one or two economic sectors,” Open Markets Institute notes, “It is persistent across a diverse range of industries. And it is often even more extreme in a regional, rather than national, context.”² Another study by Professor Gustavo Grullon showed that as a result of increasing industry concentration, the average U.S. firm has become three times larger over the past 20 years.³

As firms grow larger and industries more concentrated, we have seen the slowing of new entries to the market, one of the reasons the number of publicly traded U.S. companies have declined 46% from their peak in 1996. And this is a self-reinforcing process; as money and power concentrates in the hands of a few, dominant firms can increasingly influence regulations and create barriers to entry to prevent further competition. Or, the large companies simply buy up the competition, engulfing startups via acquisition. (“Google, Amazon, Apple, Facebook, and Microsoft have bought more than 500 companies in the past decade,” according to Bloomberg business writer Jonathan Tepper.⁴) The result is a reduction in entrepreneurship and innovation, consumer choice, and investment opportunities.

We’ve discussed the concentration of public markets and the domination of FAANG stocks in previous articles, and the issue is beginning to gain more widespread attention. A survey conducted in September 2018 by Public Policy Polling found that a majority of respondents were concerned about large corporations having too much power and that the government should “do more to break up corporate monopolies.”⁵

Perhaps we’ll see anti-trust regulations in the future, but in the meantime, what can investors do? While we cannot expand the opportunity set, we can focus on finding those opportunities that still stand out as innovators, including those in private markets. It is possible, with diligence and discipline, to find companies that are growing rapidly, are well-governed, and that are finding a footing in their industries. Those companies do exist, and by investing in them, we not only increase the investment potential for growth and return, but we also support the development of entrepreneurial endeavors. At Arnerich Massena, we also advocate for an investment strategy that includes alternatives, private equity, and real assets where possible, which can provide diversification outside of the publicly traded equity landscape. Watch our video, Stand out from the Crowd, to learn more.

<sup>1</sup> “America’s Concentration Crisis,” <em>Open Markets Institute</em>; <a href="https://concentrationcrisis.openmarketsinstitute.org/" onclick="__gaTracker('send', 'event', 'outbound-article', 'https://concentrationcrisis.openmarketsinstitute.org/', 'https://concentrationcrisis.openmarketsinstitute.org/');">https://concentrationcrisis.openmarketsinstitute.org/</a>
<sup>2</sup> Ibid.
<sup>3</sup> “American Corporations are Winning Their War on Capitalism” by Jonathan Tepper; <em>Bloomberg</em>; November 26, 2018; <a href="https://www.bloomberg.com/opinion/articles/2018-11-26/tech-monopolies-strangle-economic-growth" onclick="__gaTracker('send', 'event', 'outbound-article', 'https://www.bloomberg.com/opinion/articles/2018-11-26/tech-monopolies-strangle-economic-growth', 'https://www.bloomberg.com/opinion/articles/2018-11-26/tech-monopolies-strangle-economic-growth');">https://www.bloomberg.com/opinion/articles/2018-11-26/tech-monopolies-strangle-economic-growth</a>
<sup>4 </sup>Ibid.
<sup>5</sup> “Attacking Monopoly Power Can Be Stunningly Good Politics, Survey Finds,” by David Dayen; <em>The Intercept</em>: November 28, 2018; <a href="https://theintercept.com/2018/11/28/monopoly-power-corporate-concentration/" onclick="__gaTracker('send', 'event', 'outbound-article', 'https://theintercept.com/2018/11/28/monopoly-power-corporate-concentration/', 'https://theintercept.com/2018/11/28/monopoly-power-corporate-concentration/');">https://theintercept.com/2018/11/28/monopoly-power-corporate-concentration/</a>