By Tim Courtney, Chief Investment Officer

Over the last few months, we’ve witnessed a wave of antitrust lawsuits filed against some of the biggest names in the U.S. Amazon, Google, Microsoft and others have all come under the eye of the Justice Department who claims these companies carry some degree of monopolistic power.¹ There’s no denying the economic power of these mega-caps, which is why several of them have (or likely will have) experienced extra scrutiny.  

Antitrust laws have goals of protecting consumers and preventing monopolies. They are based on the idea that monopolies chiefly harm consumers by way of higher prices. However, it has been difficult for the government to demonstrate harm because, in many cases, consumers have benefited from lower prices.²

Popular companies, like Amazon, employ or have employed a “loss leader” strategy. This involves companies offering their core products or services at very low prices or even for free while making up for the losses through other business segments.³ In Amazon’s past, the company would incur losses on retail products and delivery while reaping profits from its cloud hosting services.⁴ Another example is smartphone apps are often “free” on app stores, however, the losses could be made up through advertising or selling user data. The loss leader strategy has become a business norm for many companies.

While this concept is not new, it has been heavily leveraged over the last decade. As the strategy has frequently led to lower consumer prices, antitrust cases have failed. Undeterred, the government is now looking at ways to rewrite the rules.

These potential changes raise other concerns because the government has played a role in creating this mega-cap situation. The ever-growing regulatory environment has tilted the playing field away from smaller companies and toward larger companies with the capacity to handle regulatory complexity.⁵ Additionally, the Federal Reserve keeping interest rates low allowed companies with losses to survive with minimal cost of capital.⁶ It is not surprising that so many of these companies gathered solid market share in a time when the cost of money was so low.

Interestingly, earlier this year, Gallup updated its annual poll about public trust in institutions.⁷ The institution with the highest trust was small business. The two institutions with the lowest trust were big business and Congress. It’s ironic that the institutions people trust the least may be the ones determining how this ends.

Based on the relatively high prices of several mega-cap companies, the market does not seem overly concerned about these cases. However, the regulatory risk is there and growing. As always, diversification remains the cornerstone of risk management. If you have any questions or concerns, we encourage you to reach out to your Exencial advisor.

Sources:

1. Quartz (1/24/23) — The ongoing big tech antitrust cases to watch in 2023
2. TechTarget (10/18/21) — Litigants face tough road with antitrust lawsuits
3. Investopedia (5/27/21) — Loss leader strategy: Definition and how it works in retail
4. CNBC.com (9/5/21) — How Amazon’s cloud business generates billions in profit
5. ExecutiveGov (6/22/22) — The impact of government regulations on small business enterprises
6. The New York Times (6/20/23) — For tech companies, years of easy money yield to hard times
7. Gallup (data as of 10/19/23) — Confidence in institutions

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