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Competitive capitalism is the key

Lately there has been much discussion and consternation over big business and corporate power. The United Sates has begun to ratchet up antitrust cases against big tech and various politicians hope to regulate big business in numerous forms.

Bermuda is not much different, but the problems of “big business” revolves around the cost of living. Some adhere to the belief that increased oversight or regulation will solve all our ills, because it is felt that the system we have now, capitalism, is not working. Ironically, the system is failing in many cases because it truly is not a free-market economy — what we really need is in fact more capitalism.


A tenet of free markets and capitalism is competition. Competition creates innovation, efficiency, and price discovery. Micro-economists would argue that competition creates firms that produce varying and new products, which in turn provide options for consumers and workers and this wide array of options naturally leads to lower prices than those that would be available in an uncompetitive market.

A monopoly and an oligopoly are affronts to true capitalism. One of the reasons why prices can remain high and escalate is a lack of competition. Concentration of market sectors in Bermuda (whether induced by the scale argument or not) can frustrate consumer welfare and societal benefits.

In the book The Myth of Capitalism by Jonathan Tepper with Denise Hearn, they note the effect of concentration of economic power with their review of research on cartels. In the book they cite a huge and comprehensive study by Purdue University's John Connor which estimates the median price overcharge to be 25 per cent.

They also detail two ways in which economists would consider market concentration — the Herfindahl-Hirschman Index (“HHI”) and the CR4 ratio. The HHI is a gauge of competitive rivalry and essentially measures the size of average firms in relation to the size of an industry. It is a simple score of concentration based on market share. Its calculated by summing the square of market share.

An HHI of less than 1,500 is considered to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.

The US Justice Department considers that any merger or transaction that increases the HHI by 2,500 is a significant market power enhancement and that may be subject to antitrust concerns. For example, if firm A has 40 per cent market share and firm B has a 40 per cent market share and firm C has a 20 per cent market share the HHI score would be 3,600 — a highly concentrated market.

An industry needs to have five or more participants to not be considered highly concentrated. The CR4 ratio also measures the market share concentration of the top four industry participants. If this number is 40 per cent to 70 per cent the industry is likely an oligopoly, and if it exceeds 70 per cent it is considered “highly concentrated”.

In Bermuda, it's not that difficult to note that almost every industry is subject to concentration. Consider just a few examples that we have:

1, One power producer.

2, One hospital.

3, Two dominant wireless phone/cable/internet companies.

4, Three healthcare insurers.

5, Three local retail banks.

You will probably note that a great deal of complaints from consumers revolve around these industries. They have also been the targets of increasing political frustration.

Numerous economic papers also mention the downward trend in business dynamism — this is often reflected by the lower number of new firm entrants or IPOs.

A competitive industry or market is often characterised by a healthy level of churn — an environment that has creative destruction but also innovative creation.

This is often mapped up by comparing the new firm entrants to firm exits. In Bermuda, we can chart this by displaying the total company formations from the Office of the Registrar. There appears to be more companies that have closed then opened.

Business owners will likely bristle at the suggestion that we need further competition. They would point to the current closure of numerous restaurants, retail stores, tourism properties and other local businesses over the past decade. These are industries in Bermuda that have significant competition. From a profit maximisation perspective, industry rivalry does directly affect profitability.

Michael Porter in 1979, in the Harvard Business Review, laid out the case that industry rivalry is subjected to four criteria: threat of entry, bargaining power of suppliers, bargaining power of buyers and the threat of substitutes.

Obviously increased competition can come in the form of all four of these which any profit-maximising company will defend against. The problem, of course, is if these threats are essentially nurtured or non-existent there will be little to no incentive to deliver products or services to the public in an efficient and cost-conscious way. Government is a poster child for this problem. What incentive, outside of public voter dismay, does the Government have to provide services and products at an efficient and low-cost basis? Who could possibly replace them or “drive them out of business”?


The largest and most salient argument against increased competition in Bermuda is scale. The argument proffers that in Bermuda, due to our limited size and diminished consumer base, numerous smaller competitors would be inefficient and unable to provide products or services with certain economies of scale.

The theory being that an oligopoly, or in the case of our power company as a monopoly, can provide the most efficient and price-effective outlay because of efficiencies gained by size that allow them to reduce cost to operate, savings that are then passed on to consumers in the form of lower prices.

While this may be true, in a world of software scale and technological deflation, it is most assuredly not the case in all circumstances. In fact, much of the high returns that larger companies exhibit are not necessarily from the efficient use of assets but really from pricing power.

This power to control prices often manifests itself in three ways: control over workers' options and in turn wages, consumer price rigidity or hikes, and/or squeezing suppliers. If there is no threat from new entrants or large regulatory hurdles that make it virtually impossible for competitors to enter a market, then it is more likely that abuses from market power can persist.

It is worth noting that the presence of many firms, however, does not in itself ensure true competition. There are many cases where firms can collude, whether implicitly or non-implicitly, in many forms such as restricting output, increasing prices (or even maintaining prices that economically should fall) or capping wage growth.

The problem with a lack of competition and excessive concentration

Top of the list of concerns in Bermuda are the cost of living and the purchasing power of workers. These problems have arisen to some degree from excessive concentration and an effective lapse in competition.

Much research has shown that concentrated labour markets lead to lower labour participation, declining productivity growth and decreasing GDP growth. All these are evident in the economy of Bermuda.

Competition between firms for labour tends to help workers by creating a market conducive to rising labour rates to retain and attract workers. The opposite happens with environments of limited labour options: environments where monopolies dominate.

One salient example cited in the Benefits of Competition and Indicators of Market Power brief by the US Council of Economic Advisers is worth quoting:

“A firm that has market power when purchasing inputs or hiring workers may be able to exploit its market power, at least in the short run. ‘Monopsony power' in the labour market may lead a firm to restrict employment, reducing wages below what they would be in a competitive market.

“In the classic example of isolated ‘company towns' in the late 19th and early 20th centuries, workers only had one option to which to sell their labour and hence could be exploited by this company, at least in the short run. (Boal, 1995).”

The key comment here being short run, but only because in the study workers had “mobility”. In a more closed and less flexible labour environment, Bermudians have less options if there are no local opportunities. Moving to the “next town” is not easy so a larger opportunity set is needed from a growing pie (see below).

In concentrated and uncompetitive markets not only do workers not have a choice of where to work but consumers do not have a choice of where to shop. When there is only one widget shop in town and I need a widget now I must accept what it costs for that widget.

I am what is called a “price taker” — I have no option. Additionally, environments of little to no competition allow service providers and goods sellers to consistently raise prices without offering any additional improvement or quality.

Solving the problem

Of course, this discussion will inevitably lead to cries for increased regulation and even price controls. This, however, is not the solution and would in fact exasperate and harm our economy. Excessive government intervention into our free market and/or regulatory overreach would irrevocably destroy the economy and create a dismal environment for all Bermudians. There is no historical example to suggest socialism is the answer to our ills. In fact, history would suggest it only invites lower standards of living.

It is my belief that you will never be able to lower the cost of living in Bermuda and provide a dynamic and strong labour market unless you grow Bermuda and in doing so invite more competing entities. What is needed is in fact more competition brought about by a larger market opportunity that can support new companies. We cannot “legislate” lower prices — it is much better for employment opportunities, variety and Bermuda overall to expand the pie and supply.

In fact, growing the pie, in my opinion, is the best and truly only long-term solution. A larger and growing economy raises the base and helps increase scalable opportunities. It offers a launching point for new business and new competing ventures.

More businesses bring more opportunities for workers and bargaining power. A larger working population spreads out the entitlement burden (the denominator grows). So, in the growth and expanding pie scenario, business and labour win — business in the form of greater sales and workers in the form of potentially higher wages and opportunities. Redistribution policies are not needed. Bermuda's success story in tourism is an example of an expanding market providing greater opportunities for locals. This is win-win, not win-lose.

Let's consider a simple formula:

Growing working population/economy = Increased aggregate demand = Increased business options available at scale = More competition/choice = Lower prices and higher labour opportunity

Growth is key. Redistributing a shrinking or stagnant pie will never solve what ails Bermuda. It will not raise wages. It will not create jobs. It will not lower the cost of living. Only increasing the pie and fostering a growing level of opportunity and choice through increasing competition can do that.

Here are a few more detailed suggestions:

1, Roll back regulations and reduce rules. Just as an overly aggressive referee can suck the life out of a football match, rules and regulations ruin the development of small/medium business.

Large companies often engage in various forms of rent-seeking or regulatory capture that merely entrenches their dominance further. If you enact a set of rules that requires ten compliance officers and 50 lawyers how many small businesses or even medium-sized businesses can possibly handle the expenses required to comply?

Meanwhile a large company can simply absorb the cost with their much larger balance sheet while it happily watches its smaller competitors struggle and, in some cases, simply fail and exit its market. A study from the Mercatus Centre of the George Mason University titled Regulation, Entrepreneurship, and Firm Size by Dustin Chambers, Patrick McLaughlin and Tyler Richards, notes that a 10 per cent increase in the regulatory restrictions on a particular industry is associated with a decrease of about 0.5 per cent of the total number of small firms within that industry.

Regulatory accumulation not only disproportionately burdens small businesses but does so at an increasing rate. Many Bermudian businesses are particularly vulnerable to rising regulation due to the increased scrutiny of offshore jurisdictions. As a result, there has been great demand for compliance personnel at the expense of business growth and overall employment.

2, Price transparency. Sunlight disinfects. Greater transparency regarding prices in all markets as well as easing searching costs for price discovery could be beneficial to consumers. Competitors have a much higher incentive to compete on price when customers can easily compare prices across multiple stores or websites.

It could also have somewhat of a chilling effect on inflation as trends would be much more apparent. The internet and search abilities are examples of how this has compressed prices and, in some cases, lowered overall prices of many consumer goods. If Bermuda wants to create a more efficient and effective consumer environment price transparency will help this.

If a certain ladder costs $50 at Store G and $35 at Store M, I would buy it at store M. But the only way I can do that now is by driving from place to place or phoning. A universal online comparison-shopping portal would help create a more competitive pricing environment and likely a convergence to a lower price.

This wouldn't need to be restricted to consumer goods but could be for a host of services as well. It's important to note, however, that this may not necessarily be a panacea for better prices, as there is still the risk in a small market that public prices may assist in further price collusion given it would be even easier to directly see what your competitor is doing and essentially mark goods to certain prices.

3, Roll back and/or relax 60:40. The threat of entrants is a very strong deterrent to market abuse. The threat of a competitor or rival establishing a position within your industry because of large profits is enough in most cases to reduce the incentive to excessively abuse consumers through large price hikes.

If it is well known that such a potential competitor could enter the market at any moment to take market share and steal your business, you are far less likely to abuse your market power at the expense of your end user if they can switch.

Relaxing 60:40 opens the market. If it is done in industries of high concentration with limited local competition, then the threat of a foreign entity becomes credible and may help check excessive market power.

4, Reduce taxes. Nothing kills small or medium business more than regulations and taxes. We discussed regulation above but changes in taxation also have a key place in fostering growth and competition. The employer portion of payroll taxes in Bermuda is poorly constructed. A much more graduated version would undoubtedly assist in employment growth within the small to medium-sized business community. The current system is somewhat arbitrary and counterintuitive to employment growth.

5, Target a higher population level. We would suggest that population growth should be a top priority. Immigration should not be curtailed, frustrated or remain a contentious issue. If we do not grow the population base and make this a major priority, Bermuda is destined to become a shell of its former self — an ageing island in decline.

The fear that an increased foreign worker population will lead to less opportunities for locals appears to be unfounded and has essentially been disproved recently. The Cayman Islands recently reported the highest number of expat workers but the lowest Caymanian unemployment rate since 2006.

From the recent article in the Cayman Compass: “Long-term data shows that the growth in the labour force and in the number of foreign workers did not impact the total number of out-of-work Caymanians, which peaked at close to 2,000 in 2012. Since then the labour force increased from 38,800 to nearly 46,200 today, while the number of unemployed Caymanians halved to 996.”

Growing the pie even with immigration only expands industries and opportunities for local workers as well.

Capitalism in Bermuda isn't broken, it's just not really capitalism. Capitalism requires dynamic, competitive markets. Competitive markets that promote efficiency and growth. We do not need to enact excessive regulation, nor should we ever even consider centrally controlling prices. We simply need a level playing field for entrepreneurs and small business that helps promote lower prices and better consumer products.

To facilitate this, we must focus on expanding the pie and invite increased competition and options for workers and consumers. Only more capitalism will fix what is broken by increasing consumer welfare and societal benefits.


The Myth of Capitalism by Jonathan Tepper — https://www.amazon.com/Myth-Capitalism-Monopolies-Death-Competition/dp/1119548195

John M. Connor, Price-Fixing Overcharges, rev. ed. (February 24, 2014) — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2400780

“Unemployment rate drops to 2.8 per cent; lowest rate since 2006”, by Michael Klein, Cayman Compass, May 27, 2019 https://www.caymancompass.com/2019/05/27/unemployment-rate-drops-to-2-8-lowest-rate-since-2006/

Regulation, Entrepreneurship, and Firm Size by Dustin Chambers, Patrick McLaughlin and Tyler Richards https://www.mercatus.org/publications/regulation-entrepreneurship-and-firm-size

Benefits of Competition and Indicators of Market Power, Council of Economic Advisers, Issue Brief, updated May 2016 https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160502_competition_issue_brief_updated_cea.pdf

Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the chief financial officer of Anchor Investment Management Ltd and can be contacted at nkowalski@anchor.bm

• Disclaimer: The sole responsibility for the content of this article, lies with the author. It does not necessarily reflect the opinion, policy or position of Anchor Investment Management Ltd. The content of this article is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to accuracy and are current only at the time written. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trade mark or copyright claims should be directed to the author by e-mail.

Struggling for growth: a graph showing the number of companies on the books of the Registrar of Companies (Source: Quarterly Bulletin of Statistics, Bermuda Department of Statistics)

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Published July 01, 2019 at 9:00 am (Updated July 01, 2019 at 1:07 am)

Competitive capitalism is the key

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