Common Ownership, Institutional Investors, and Antitrust

One of the most important issues in antitrust at the moment is whether institutional investors’ significant equity holdings in U.S. companies are substantially harming competition in violation of the antitrust laws. In a new article, available here, I conduct a systematic analysis of the competitive effects of common ownership and show that, while there are economically sound reasons why common ownership can generate substantial competitive harm, there are also economically sound reasons why, in a given market, it may not. For that reason, the mere fact that institutional investors’ significant equity holdings generate high levels of common ownership by itself is insufficient to conclude that common ownership is generating substantial competitive harm. Instead, the article shows, determining the extent of competitive harm, if any, caused by common ownership in a given market necessitates a case-by-case approach that evaluates the many factors relevant to common ownership’s effect on competition.

It is well-established that institutional investors in recent decades have taken increasingly large positions in U.S. companies, and they now hold a substantial percentage of the equity issued by those companies. It is also well-established that institutional investors’ holdings include non-trivial positions in many companies that compete against one another. As a matter of economic theory, this common ownership can reduce incentives to compete, thereby harming consumers in the relevant market. If a firm’s shareholders have ownership interests in a rival, then a decrease in the vigor with which the firm competes increases its rival’s profits, which are ultimately returned to the firm’s shareholders through their ownership interests in the rival. In other words, common ownership can create an incentive for a firm to sacrifice its own profit for that of its rival, causing the firm to compete less and prices to rise. These competitive dynamics are driven solely by changes in financial incentives and are not predicated on common owners controlling or communicating with the firms in which they invest, though such control or communication can amplify the competitive harm.

While economists have known of these potential competitive effects for some time, and the antitrust authorities challenge acquisitions resulting in significant levels of common ownership, antitrust scholars did not focus on common ownership until recently, when a group of economists empirically identified a potential causal connection between institutional investors’ holdings and reduced competition in two market segments. These empirical findings, coupled with the extensive common ownership in the U.S. economy and the potential for competitive harm, generated considerable concern in and outside of academia and calls for significant overhauls of antitrust policy and institutional shareholding.

The potential for competitive harm, however, does not answer the question most germane to antitrust policy: whether, and under what circumstances, common ownership actually will substantially lessen competition in a given market. The article shows that the answer depends on numerous factors, including the nature and extent of common ownership in the relevant market, the structure of the market, shareholder incentives, and managerial objectives. Similarly, while market entry and efficiencies may ameliorate some of the competitive effects of common ownership, that too cannot be known a priori.

Accordingly, as the article shows, while common ownership potentially can generate substantial competitive harm, whether it will actually do so in a given market will depend on the circumstances. For instance, common ownership may cause substantial competitive harm if the firms’ products are homogeneous or close substitutes for each other but not if the products are poor substitutes. As another example, while common ownership may increase the likelihood of collusion by making it easier for firms to form or monitor a collusive agreement, common ownership may also decrease the likelihood of collusion by making it harder for firms to punish deviations from the collusive agreement. As the article explains, there are many other reasons why common ownership may or may not generate competitive effects in a given market. It is important to note that this does not mean that common ownership cannot generate substantial competitive harm, or that antitrust enforcement should ignore common ownership, only that there is no economically sound basis to conclude that common ownership necessarily will generate substantial competitive harm.

These findings have a number of modest but important consequences for antitrust policy. Notably, because there is no unequivocal answer to whether and to what extent common ownership in a given market will generate competitive effects, and because economic understanding of those competitive effects is in an early stage, common ownership should continue to be evaluated on a case-by-case basis rather than restricted or subject to widespread antitrust investigation or, alternatively, protected with safe harbors or presumptions of legality. In assessing the competitive effects of common ownership, courts and the antitrust agencies should adopt a totality of the circumstances approach that incorporates all factors bearing on common ownership’s potential competitive effects. As the article explains, this approach remains true to the modern structure of antitrust and current understanding of common ownership’s effect on competition.

This post comes to us from Menesh S. Patel of the Program in the Law and Economics of Capital Markets at Columbia Law School and Columbia Business School. It is based on his recent article, “Common Ownership, Institutional Investors, and Antitrust,” available here.