As is now well known, the general ownership of publicly traded companies has grown rapidly in recent years. There has been a debate over whether this could affect competition, with a particular focus on product prices. The theory has been alleged to be simple enough: if companies in the same industry have the same owners and they act in the interests of their shareholders, they will compete less aggressively in the product market (Rotemberg 1984, O’Brien and Salop 2000).
However, this theory misses an important point, which is that the recent rise of general ownership is not an industry-wide phenomenon but an economy-wide phenomenon, driven by index funds that are close to and contain ‘universal owners’. Every firm doing business openly in the economy. Indeed, our recent theoretical work (Azar and Vives 2021) shows that, in a common balance oligopoly model, common ownership refers to the whole economy. Low Markup for consumers, not superior. The reason is that, in general equilibrium, when an industry expands, it creates a positive outlook for firms in other industries, and therefore increases the incentive for inter-industrial general ownership firms to expand, lowering prices in their industry compared to the price level. It turns out that this effect, in a standard model, is stronger than the intra-industry effect that creates general ownership of firms in the same industry. Thus, the total effect is to reduce the product market markup.
Experimental literature, however, has so far focused primarily on intra-industry general ownership and measuring its impact. Therefore, inter-industry is an important missing variable in general ownership analysis. In this column, we address this issue by measuring the common ownership of both intra-industry and inter-industry and by re-evaluating the evidence of its competitive impact on the airline industry. Although the theory is not specific to the airline industry, we use it as an empirical example because it allows us to directly compare the results of Azar et al. (2018), and thus see which results of that paper change when considering the effects of general equilibrium.
Our main finding is that while it is still the case that inter-industrial general ownership is positively associated with airline pricing, inter-industrial general ownership is negatively associated with airline pricing. The overall predictive effect of general ownership on prices is positive in some routes and negative in others. The average impact is positive, but only because some shareholders are concentrated in the airlines, and so this failure of complete diversification implies that the general ownership of the inter-industry is somewhat greater than that of the inter-industry in practice. Although the general proprietary measures are positively correlated, a LASSO variable selection model, with ten-fold cross validity selected to reduce predictive errors outside the sample, suggests that the model should include both variables.
In addition, we conducted a panel vector autorigration (VAR) analysis and found that both intra-industry (Lambda Intra) and inter-industry (Lambda Inter) common ownership granger-cause value, in the sense that Lambdas’ past values are significant for the future. Strength, while past values of prices do not significantly predict future changes in general ownership.
Figure 1 Impulse response function from airline pricing panel VAR, inter-industry common ownership and inter-industry common ownership
Also, we distinguish intra-industry general ownership into two measures – a ‘Big Three’ asset managers (BlackRock, Vanguard, and State Street) measure intra-industry general ownership, and other shareholders measure intra-industry general ownership. That’s not the big three. We see that while the general ownership of shareholders in the inter-industry other than the Big Three is positively associated with airline pricing, the general ownership of the Big Three is negatively associated with airline pricing (although the negative impact on price is not statistically significant in all specifications). While controlling for, the effect of inter-industrial general ownership by the Big Three became positive. However, we show that the overall effect of the Big Three on prices is negative.
Figure 2 Distribution of the total effect of common ownership in the linear prediction of log price: Big Three vs. other shareholders
One of the main systematic criticisms of Azar et al. (2018) is a measure of the impact of general ownership, MHHI Delta, based on the market share of companies in the market, which is intrinsically determined. MHHI is an extended version of HHI that considers overlapping ownership between firms in an industry. The MHHI delta is the difference between MHHI and HHI. However, our economic model suggests that a share-weighted average of a firm’s Lambdus is a good measure of the general ownership of that carrier. To address the endogenousity of market share, we use the weightless mean of the objective function weight. Using the pair-based objective function weight for general ownership measurement was proposed by Azar (2012: Chapter 7).
In addition to panel regression analysis, we conducted an event study based on the consolidation of financial institutions following He and Huang (2017) and Lewellen and Lowry (2021). This amalgamation has created a divergence in inter-industrial and inter-industrial general ownership across airlines. By estimating Lambdus’ impact on prices based solely on this acquisition change, we have confirmed our main results that inter-industrial general ownership increases prices, while inter-industrial general ownership increases prices lower prices. Bindal and Nordlund (2022) use a similar approach and find that the positive effect of intra-industry general ownership on margins is more pronounced for companies with similar products.
Figure 3 Effects of general ownership of inter-industry and inter-industry on pricing based on an event study of asset manager consolidation
Combining overlapping ownership with firm decisions (e.g. Hemphil and Kahan 2019, Elhauge 2021, Tzanaki 2022) is a logical process that is controversial. We are agnostic on this question. However, it is worth noting that inter-industry general ownership is on the radar of large asset managers when they consider their corporate governance strategies. For example, Barbara Novik recently wrote an article for the Harvard Law School Forum on Corporate Governance (Novic 2019) Solving the Problem (Emphasis):
The ‘common ownership’ theory relies on the notion that all ‘common owners’ benefit from less competition, as it derives from oligopoly and ‘cross ownership’ theories (e.g., where a company buys a share of its competitors). While less competition may benefit some concentrated investors, broadly diverse investors, such as index funds, own the entire market and do not benefit from less competition. This is because it is subject to a wide variety of investors Inter-Industry Effects- That is, what happens in one sector affects the performance of fund holding in another sector.
Our results are potentially important for recent debates on the impact of general ownership trusts (see Elhauge 2016, Posner et al. 2017, and Rock and Rubinfeld 2017). Our general equilibrium analysis shows that competitive effects in the product market are driven by inter-industrial general ownership while inter-industrial general ownership is competitive. The result is that due to the inter-industrial impact that was previously overlooked in empirical work, the common ownership of diversified shareholders, such as the Big Three, actually predicts lower market prices for products.
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