RCI.B , T and BCE. The value of an oligopoly, empirically measured.

RCI.b aug 15 2013T aug 15 2013BCE aug 15 2013

See also previous blogs on these stocks individually.

Theoretical economics has wonderful “models” that will tell you what the value of a monopoly is, the so called monopoly rent. Oligopolies are slightly more difficult because of the relationships between the , small number, of players. Typically all kinds of supply and demand curves are drawn and by shifting them to the right or the left, or up or down you solve the rent question simple by measuring the surface area created in this manner. The practical drawback is that nobody really knows where the demand and supply curves fit in the model and what shape they might have.

Empirically, every now and then, real life provides the opportunity to figure out what the “rent” is actually worth. POT, Potash Corp recently gave a good indication of how high such a rent might be. In Canada the above three telecom companies control about 90% of the market. Our government would like a little more competition and is consequently contemplating selling certain blocks of frequencies and allowing the sale of one or two smaller players to entice foreign companies to enter the fray, in particular Verizon which is about three times larger than these three combined. The complaint is that this is so un-Canadian because we are, as a nation very fair, perhaps, but why are we then the oligopoly paradise of the world?. Full page adds trumpet the unfairness and even the labour unions are weighing in on the argument. The whole thing is almost pathetic  and is reminiscent of the silly arguments BCE offered a few years ago to go private, quite unsuccessfully by the way. Cutting through the propaganda we can observe that all three stocks recently dropped by 20 to 25 percent.(wave 1 of down). Presently we are in a wave 2 up that is not yet complete. So, all other things being equal (they never are!) it follows  that the mere suggestion of Verizon entering our market, and then the announcement that this will be postponed caused this drop and ergo one might conclude that the oligopoly rents are (at least) in the order of 25% and perhaps a lot more. Despite all the pathetic demagoguery the past weeks or so, this is something the average Canadian has known for years!

After a bounce we would unload all three.