Monopoly nation: How Big Tech's global power has lifted the U.S. stock market
The outperformance of the U.S. stock market and its broader economy can in large part be attributed to its superabundance of world-spanning monopolies.
Why it matters: The world's biggest tech monopolies are overwhelmingly American. That's been great for investors, although the jury's still out on whether it's good for citizens more broadly.
The big picture: Apple has a monopoly in smartphones. Alphabet has a monopoly in search. Microsoft has a monopoly in computer operating systems. Amazon has a monopoly in e-commerce. Nvidia has a monopoly in AI chips. Meta has a monopoly in social networks.
- It's no coincidence that these firms are the six most valuable private-sector companies in the world — indeed, they're the only ones worth more than $1 trillion. (That's a benchmark even Berkshire Hathaway has never achieved.)
- Between them the six monopolies are worth more than $13 trillion, or more than $100,000 per U.S. household.
Between the lines: Don't get hung up on the etymology of "monopoly" — from the Greek monos, meaning single, and pōlein, meaning sell. It's perfectly possible for two or more players in a competitive market to all be monopolies.
How it works: Under U.S. antitrust guidelines, it's legal to be a monopoly or to grow organically to become one, but two companies aren't allowed to merge if doing so would create a monopoly.
- It is illegal to abuse a monopoly to crush your competition and harm consumers. That's what the DOJ just accused Apple of doing.
By the numbers: A monopoly — or, to use its technical term, a "highly concentrated market" — is defined by the Department of Justice and the Federal Trade Commission as a market where the Herfindahl-Hirschman Index, or HHI, is greater than 1,800.
- HHI is calculated by summing the squares of the market shares of the companies in the market. That means its highest possible value — one company with 100% market share — is 10,000.
- A market with four companies, each with a 25% market share, would have an HHI of 2,500. But a market with 10 companies, each with a 10% market share, has an HHI of only 1,000.
Reality check: A large part of the jurisprudence of antitrust comes down to defining markets. Are AI chips a market? If so then Nvidia clearly has a monopoly. On the other hand, if the market in question is semiconductors more broadly, then Nvidia isn't close to being a monopoly.
The bottom line: Monopolies tend to have extraordinary pricing power, profits, and valuations. That's something we're seeing today in Big Tech.