The Quest for Monopoly

This week in Napkin Math we have something special: a guest post from Marc Rubinstein of Net Interest. Net Interest is a weekly newsletter covering the financial sector and Marc is a former hedge fund manager with over 25 years of experience in and around banks and the financial sector. I think you’ll enjoy this post and highly recommend you check out his newsletter.

A few weeks ago the CEOs of the four large tech companies - Facebook, Apple, Amazon and Google - sat in front of Congress to testify. They’d been summoned to a hearing to address the issue of online platforms and market power. It was a big event. For over three hours the four men faced a grilling from legislators over their market dominance. The chair of the subcommittee overseeing the hearing set the tone:

“American democracy has always been at war against monopoly power.”

Over the course of the proceedings various analogies were thrown out there—Rockefeller’s oil empire, the railroads, Microsoft. One that didn’t receive much attention was the stock exchange. Which is ironic because while the men were speaking, billions of dollars of their stock was trading hands on a platform subject to its own monopoly scrutiny.

The stock exchange analogy is an interesting one because it highlights the fluid nature of monopoly structures. What started as a fragmented industry over two hundred years ago - first monopolised, then fragmented again - has monopolised once more. At every turn policymakers have sought to influence the outcome but consequences have not always been as anticipated.

This piece looks at how to sustain a monopoly, through the lens of the New York Stock Exchange.

From Fragmentation to Monopoly

Stock exchanges operate as simple two-sided platforms, matching buyers and sellers. Like other platforms, they benefit from network effects. The more people that transact, the greater the value of the platform to others. As traders say, “liquidity begets liquidity”.