Policy Implications of the Common Ownership Debate

Date01 March 2021
Published date01 March 2021
Subject MatterArticles
ABX985802 140..149 Article
The Antitrust Bulletin
2021, Vol. 66(1) 140–149
Policy Implications of the
ª The Author(s) 2021
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Common Ownership Debate
DOI: 10.1177/0003603X20985802
Eric A. Posner*
Empirical findings that common ownership is associated with anticompetitive outcomes including
higher prices raise questions about possible policy responses. This comment evaluates the major
proposals, including antitrust enforcement against common owners, regulation of corporate
governance, regulation of compensation of management of portfolio firms, regulation of capital market
structure, and greater antitrust enforcement against portfolio firms.
common ownership, antitrust, financial regulation
Azar, Schmalz, and Tecu’s (AST) paper Anticompetitive Effects of Common Ownership launched an
enormously important debate about capital markets.1 Like much path-breaking work, it was initially
derided, pooh-poohed, and even mocked. But whether or not the empirical method used in that paper
withstands the test of time, the questions it raises will. And with the accumulation of evidence that
common ownership effects do matter and are likely harmful for markets,2 the urgency of policy reform
in the area of antitrust and capital markets regulation has become inescapable. This symposium issue,
which includes further empirical studies3 and a helpful survey,4 offers an opportunity to reflect on
policy implications.
1. Jos´e Azar et al., Anticompetitive Effects of Common Ownership, 73 J. FIN. 1513 (2018) (hereinafter Azar et al.,
Anticompetitive Effects).
2. While the literature has focused on product markets, Marshall Steinbaum, Common Ownership and the Corporate
Governance Channel for Employer Power in Labor Markets, 66 ANTITRUST BULL. 123 (2021), this issue, points out that
the anticompetitive effects of common ownership could be much broader, encompassing labor markets, for example.
3. Mohammad Torshizi and Jennifer Clapp, Price Effects of Common Ownership in the Seed Sector, 66 ANTITRUST BULL. 39
(2021) this issue; Albert Banal-Esta˜nol et al., Common Ownership in the U.S. Pharmaceutical Industry: A Network Analysis,
66 ANTITRUST BULL. 68 (2021), this issue; Jin Xie, Horizontal Shareholdings and Paragraph IV Generic Entry in the U.S.
Pharmaceutical Industry, 66 ANTITRUST BULL. 100 (2021), this issue.
4. Martin Schmalz, Recent Studies on Common Ownership, Firm Behavior, and Market Outcomes, 66 ANTITRUST BULL.
12 (2021), this issue.
* University of Chicago, Chicago, Illinois, USA
Corresponding Author:
Eric A. Posner, University of Chicago, 1111 E. 60th St., Chicago, IL 60637, USA.
Email: eposner@uchicago.edu

AST is largely an empirical paper, but the theoretical basis of their argument is profoundly impor-
tant. The history of antitrust law has a whack-a-mole-ish quality, familiar to economists and lawyers as
the call-and-response of regulatory arbitrage and legal reform. Economic theory going back to Adam
Smith tells us that firms can maximize profits by colluding. The easiest form of collusion is price-
fixing, which was duly outlawed. Block price-fixing and firms can merge, acquire each other’s assets,
or share directors. Block all this, and the firms can sell themselves to a single third party, who will pay
a high price for the shares in order to obtain a monopoly. And if this is banned by law, each firm might
sell some shares to the third party (or to each other), so that the incentives to compete are softened. The
third party will pay a premium for shares owned by the shareholders of the firms, and it can buy up a
large enough stake in each firm, so that it can use its influence over both firms to soften competition.
Because of the complex and obscure relationship between the size of a shareholder’s stake in a firm
and the degree of that shareholder’s control or influence over the firm, antitrust authorities may have
trouble proving that a particular stake is large enough to create a risk of anticompetitive outcomes.
That difficulty creates opportunities for entities to obtain control incrementally over competing firms
and use that control to decrease competition, without drawing antitrust scrutiny.
This logic is inescapable; the only question is the magnitude of the empirical effects.5 AST’s results
may have provoked skepticism in some quarters because the largest common owners of the airlines
they studied were behemoth institutional investors, including BlackRock and Vanguard, who had
acquired substantial interests in the underlying firms through the massive expansion of their index
mutual funds. Index funds are supposed to be passive: Index funds cannot exert discipline over firms
by threatening to sell shares, and they have always trumpeted their passivity as a virtuous means for
minimizing expenses. Indeed, the institutional investors bragged about the puniness of their corporate
governance offices. But while the institutional investors play an outsized role, we should not forget that
thousands of common owners exist, most of them active, and AST raises questions about their behavior
as well.
One group of criticisms of AST centered on the question of “mechanism”: what was the mechanism
with which institutional investors compelled portfolio firms to raise prices and reduce output? The
critics believed that the institutional investors made their money honestly—by offering active funds
that picked stocks or index funds that spared investors the trouble of managing a diversified portfolio
directly through stock or bond transactions—or were at least too lazy, inhibited by institutional
barriers, or risk-averse to compel portfolio firms to collude. Like Great Britain, the common owners
obtained their empires in a fit of absence of mind, as they met the market demand for passive investing
with increasingly cheap and efficient index funds and index exchange-traded funds. And critics argued
that index fund managers lacked an incentive to reduce competition among the portfolio firms since
the fund managers were not compensated with a share of those firms’ profits. (The managers were, and
are, compensated based on assets under management, which would normally increase if profits of
portfolio firms balloon as a result of anticompetitive behavior and hence attract greater capital for
those firms, but this form of compensation may seem like a blunt instrument.)
Moreover, some researchers have found statistical or anecdotal evidence that common ownership
produces social benefits by internalizing positive externalities across firms, like those that are due to
research.6 These papers strengthen AST’s major point that common ownership affects the behavior of
the portfolio firms but cloud the normative implications of the paper. If this recent work holds up, it is
unclear whether common ownership should be condemned for undermining market competition or
celebrated for creating efficiencies.
5. The empirical issues have been amply debated elsewhere, and so I will not address them here.
6. Miguel Ant´on et al., Innovation: The Bright Side of Common Ownership? (June 21, 2018) (unpublished manuscript), https://
ssrn.com/abstract¼3099578 (hereinafter Ant´on et al., Innovation).

The Antitrust Bulletin 66(1)
Policymakers must therefore confront three questions. First, is the time ripe for intervention or
should they wait for more academic work to create a larger consensus among independent academics
about the empirical effects of common ownership? Second, if or when policymakers should intervene,
what is the appropriate regulatory response? Here, the question of the mechanism is important because
the policy response—for example, antitrust litigation, as opposed to some form of regulation—should
normally be tailored to the mechanism. And third, how should policymakers address common own-
ership if it both allows firms to internalize externalities and reduces competition? In the remainder of
this comment, I address these three questions.
Intervene or Wait for More Research?
In arguing for legal intervention now, Elhauge trenchantly invokes tobacco regulation, noting that
tobacco companies...

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