Profit share trumps market share.

You may have read an earlier blog where I explained the significance of the HHI. To briefly reiterate,  the HHI is, according to the DOJ complaint against ATT, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm in the market and then summing  the resulting numbers. For example, in a market with four firms with shares of 30, 30, 20 and 20 percent, the HHI is 2600 (900 + 900 + 400 + 400).

The HHI misses the point. The presumed presence of market power because a few firms have  market share percents that when squared and summed are more than 2,500 is poppycock.  Real market power is when you can compel the phone companies to pay you $600 for something they sell for $200. Ok. Ok. I understand the long term contract notion. However, Apple, according to all the smartphone pundits, does not even have a controlling market share. The winner in that department goes to Android. Moreover, Apple takes home the dollars and allows the other smartphone makers to divide up the pennies from their large market shares.

The real measure of market domination is the concentration of industry profits. And as you may have guessed, Apple with a 20% smartphone market share takes home 80% of the smartphone industry profits. Profit share trumps market share.

Let's see now if I squared the market share, then cubed the profit share, then summed the totals and subtracted 4,600 and added back the difference between the price earnings ratio of the three dominant companies, and finally added the market valuation of each firm in the industry, I would have a new guideline for presumed antitrust violations.

Frankly, I can not resist pointing out that profit share is true market dominance, not market share.  For example, if ATT reduced their phone plan price to unlimited usage for $10 per month and then gave away the iPhone for free, they would have a 80% market share. According to the HHI scale, this equals 6400 which is a presumed high likelihood of market power. And that would be true except ATT would also be bankrupt.