H OW CAN you identify the hotspots in the economy where competition might be a problem? The Economist has tried to answer this question with a series of filters which we have applied to the top 500 firms in America. The process is designed to narrow down where trustbusters may want to look more closely. Existing competition doctrine is not helpful in this exercise, since it lacks any clear sense of what competition is. Instead the inspiration is Warren Buffett, an investor. He argues that some firms have “moats” that protect them from competition. Often these are deserved, being the result of investment, innovation or excellence. In some cases they are not.

The first question is whether a moat exists. We include firms in concentrated markets, or ones that are heavily regulated or reliant on patents, or whose customer is the state. The next point to decide is whether companies are highly innovative or not. Schumpeter would, correctly, argue that firms which innovate deserve a window of competitive advantage. The third filter is the size of firms’ rents, or the free cashflow generated above a hurdle rate, which could reflect either innovation or a lack of competition (we assume a 12% hurdle rate, exclude goodwill and treat R & D as an asset with a ten-year life).

Then we consider openness, or whether market shares and returns on capital shift around, and whether new entrants exist. Finally, in a nod to worries about Amazon and Netflix, we consider the capacity for firms with keen prices and low rents to engage in long-term “clawback” by eventually cranking up prices in the future. It is a bad idea to punish firms that are a source of disruption, but worth keeping an eye on what they may do in future.