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Oligopoly in a credit rating systemic market

By agency, S&P Ratings, Moody’s, and Fitch (held by Fimalac) represent the largest credit rating companies in the world: as of 2011, S&P had 1,416 credit analysts; Moody’s, 1,252; and Fitch, 1,096. The next credit rating firm ranked by agency was A.M. Best with 123 analysts. By revenue, the same group of three companies tops the table: as of 2011, Moody’s brought in $2,281 million; S&P, $1,767 million; and Fitch, $757 million. DBRS, the next largest agency by revenue to publish financials, and with a similar number of analysts (118) to A.M. Best, posted sales of $8.23 million.

The OECD defines the term “oligopoly” as “a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power.” As a result, it is rational for firms to “behave cooperatively. That is, they collude in order to maximize joint monopoly profits.”

A systemically important industry or market can be distinguished from any other market as follows: because of the relatively large amount of interconnectedness the market has with the rest of the economy, and because of the importance of the quality, transparency, and lack of fraud involved in the performance of the service, the risks specific to the market determine some form of general risk to the larger economy. The credit rating industry is a prime example of such a market, displaying both interconnectedness and the importance of transparency: credit rating is a service necessary to the existence of any advanced, mature, or large financial sector, and, through this large sector, the credit rating industry is connected to every other part of the economy; historically, transparency and quality (or its lack) has been deemed as a causative factor in the near-collapse of the financial sector in 2007-8.

What follows is a somewhat unusual characterization of any market. Important enough to be seen as demonstrating actions necessary to the global financial system’s near-collapse, and yet characterized by one of the most archetypical cases of oligopoly; interconnected enough to spread risk to every investor on the planet, and yet relatively lightly regulated.

Find this interesting. For more, check out MarketLine business case study Credit Rating Agencies: oligopoly in a systemic market. You may also check out our Buy Reports section for thousands of other company, industry & country analysis reports.

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