Blue chips have entrenched advantage: study

Blue chips have entrenched advantage: study

Australian companies that hold a 'dominant' position in concentrated industries tend to generate excess returns, according to a new study.


A new study by the Centre for International Finance and Regulation (CIFR) found a significant correlation between concentration and innovation.

The study, authored by CIFR chief executive David Gallagher, Katja Ignatieva and James McCulloch, found that dominant companies in concentrated markets invest as much as three times more in innovation than those in lower concentration markets.

However, the study's findings are at odds with a similar study into concentrated industries in the US.

A 2006 study (Hou and Robinson) found that US companies operating in highly concentrated industries are not motivated to invest in innovation and, as a result, experience lower risk-adjusted returns.

Professor Gallagher said the contraction in findings could be resolved by an examination of the differences in size and competition in the US and Australian industries.

"Australia is a relatively small open economy where concentrated industries are dominated by large companies with a high market power," Professor Gallagher said.

"In contrast, the rigorous regulatory environment and size of the US market make it an efficient market for goods and services. Dominant companies in concentrated industries in the US cannot generate the same magnitude of monopoly rents as dominant companies in Australia," he said.

While the findings of the study may be music to investors' ears, it does raise concerns about monopolistic behaviour in Australia, Professor Gallagher said.

As a result, the new study's findings could be of interest to people considering the recommendations of the recent Harper Review in competition, he said.

 

Blue chips have entrenched advantage: study
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