Is common ownership the Doomsday Machine for the operation of free markets, competition and capitalism as we know it? An observer of cutting-edge law and economics literature may indeed tend to believe that we are approaching a point of ultimate antitrust apocalypse.
The dramatic tone of the ongoing transatlantic debate on common ownership is underscored by a set of novel yet controversial economic theories, developing empirical evidence, and timid enforcement action. Commentators are split both as regards the significance and nature of the problem(s) posed by common ownership as well as over the need for regulatory intervention. Policymakers follow these scholarly developments but are reluctant to draw strong conclusions. This is potentially an area of public concern, but the million-dollar question is: how much of a (real) concern? Are we ready to step into action? On what basis? And what should be done when there is no clear consensus on the notion, extent and harmful implications of common ownership?
My recent article 'The Common Ownership Boom - Or: How I Learned to Start Worrying and Love Antitrust' tries to unfold the ongoing antitrust-focused debate by exploring a series of questions: i) who is a common owner; ii) what are the negative externalities of common ownership; iii) which are the potential anticompetitive mechanisms and theories of harm; iv) what are the appropriate legal solutions to any competition concerns. While there is so much we do not know, common ownership forces us, with some urgency, to revisit and review whether our existing antitrust tools, methods and policies are well fit for purpose.
Common ownership and range of concerns
Common ownership is a new economic reality, well noted in the US and rapidly growing in Europe. The concept refers to a situation where a common set of large, diversified financial investors simultaneously hold non-controlling ownership interests in several competing firms in an industry. These shareholder overlaps among competitors and the concentration of 'ownership via intermediation' by a few, large institutional investors may entail wide-ranging consequences.
The rise of institutional investors and passive index funds has created significant benefits in terms of portfolio diversification and corporate governance. Yet, what has been thus far less recognised are the negative externalities of common ownership and index investing. Common ownership may lead to concentration of corporate power, potential conflicts of interests and new types of agency costs between asset owners and investment fund managers or between diversified and undiversified shareholders, and suboptimal operation of financial markets due to increased volatility and correlation of stock returns and blunted price signals. Intriguingly, ground-breaking economic scholarship suggests that rising and concentrated institutional investment may have further 'hidden' social costs: reduced product market competition and increased industrial concentration.
Antitrust theories of harm and efficiencies
Market concentration and market power arising from common ownership is a hotly debated issue in competition law and economics circles. Research is developing with regard to empirical evidence, theoretical measurement tools and potential transmission mechanisms to capture the impact of common ownership on competition. Yet, common shareholding may affect corporate policy and empirical studies confirm its anticompetitive effects in concentrated product markets.
Economic analysis has primarily focused on unilateral anticompetitive effects: common shareholding may lead to short-term price increases due to lessened incentives to compete between the commonly owned firms. However, long-term anticompetitive strategies such as (tacit) collusion or (parallel) exclusion may also be linked to common ownership and may indeed be more likely theories of harm. On the other hand, common ownership may create pro-competitive efficiencies or positive spillovers on innovation.
Importantly, long-term anticompetitive effects or efficiencies based on coordination need not depend on (partial) control or active influence within corporate governance but may be also based on communication mechanisms or altered long-term incentives to collude flowing from partial ownership. Indeed, firm management control and market concentration may not be conclusive of antitrust harm or good predictors of that harm. Common ownership does not typically hinge on formal legal control or stand-alone economic control of the firm but reflects situations of indirect, de facto, collective control in firm governance and product markets due to the interaction and cumulative effect of small parallel holdings in competitors by diversified investors.
Competition policy and enforcement
Existing merger control and antitrust law could be applicable to potentially harmful common ownership cases but is either practically limited or not well suited to capture the full range of such cases. Policymakers, for instance at the US Federal Trade Commission, the European Commission, the German Monopolkommission and the OECD, recognise the importance of the issue and the need to re-think current rules and practices.
In my article, I suggest ways to guide antitrust authorities going forward: 1) update traditional merger analysis to account for common shareholding when reviewing mergers between industrial firms or asset managers; 2) reactivate and update antitrust enforcement in line with any new theories of harm associated with common shareholding; 3) more deeply understand all possible ways in which common ownership may lead to anticompetitive effects or efficiencies, so we are able to duly appreciate and weigh the two under merger control or antitrust enforcement.
Common ownership is a complex problem that calls for careful and balanced solutions. Further research is needed to inform competition policy and enforcement; yet, regulatory complacency is also not justified. Staggered legal change and case-by-case assessment based on detailed guidance may be a wiser approach to the common ownership challenge.
Anna Tzanaki is a Max Weber Fellow at the European University Institute and a Senior Research Fellow at the UCL Centre for Law, Economics & Society.