Does Common Ownership affect product market outcomes? – Professor Martin Schmalz #atomicIdeas

Common ownership is when the same investors own significant shares in competing companies.

This practice has become more prevalent due to an increase in people managing money in mutual funds and index funds, leading to larger institutional investors owning corporate equities.

Large asset management firms like BlackRock and Vanguard hold substantial control over the total market of bonds and stocks due to their size.

This concentrated ownership can potentially influence not just financial markets but also product markets.

A study by three finance professors revealed an association between common ownership and ticket prices in the airline industry.

When common ownership was higher, airlines seemed to charge higher prices on those routes.

‘Well, that raises enormous concerns, because all of a sudden, what seems like a fantastic innovation, almost free diversification services…all of a sudden, there’s a possible downside that by having these very large intermediaries providing these very low cost services, there’s a downside in terms of product competition that consumers are worse off.’ – Jonathan Burke

To establish a causal effect between common ownership and ticket prices, the authors used a merger between two asset managers as an experiment.

They observed that route prices increased on routes with higher common ownership one year after this merger.

‘So what’s basically happened is the role of intermediaries has come very large…most people would say this trend has been really good…it’s allowed people to hold diversified portfolios at very low cost.’ – Jules van Binsbergen

While diversification services provided by large intermediaries seem beneficial for consumers due to their low cost, they might have unintended consequences in terms of product competition.

Economies of scale enjoyed by large managers could be jeopardized if their size were restricted, which could increase the cost of diversification services.