The antitrust issue is one of common ownership, a circumstance in which one or more of a firm’s shareholders directly or indirectly has a concurrent equity interest in one or more of the firm’s rivals. While common ownership is not new to antitrust, it had largely been neglected by scholars until recently, when a group of economists conducted empirical studies showing a potential relationship between prices and the extent of institutional investors’ common ownership in two market segments. The analysis in these articles relied heavily on a modified metric of market concentration, called the Modified Herfindahl-Hirschman Index (MHHI). The MHHI is based on the HerfindahlHirschman Index (HHI) commonly used by courts and the federal antitrust agencies in merger cases but adds to it an additional concentration metric that incorporates common ownership, the MHHI delta. In addition to showing possible price effects in the two market segments, these and other related studies documented high levels of common ownership in the United States and demonstrated that the very same institutional investors are among the top shareholders of competing firms.
These studies generated considerable concern in and outside of academia. Some considered the high levels of common ownership in the United States economy, coupled with the empirical findings, as evidence that common ownership was generating significant competitive harm and called on the federal antitrust authorities to take action. One well-known proposal asks the Department of Justice and the Federal Trade Commission to investigate any stock acquisition that results in the MHHI and MHHI delta exceeding certain threshold amounts. A competing proposal would limit investors’ shareholdings in certain industries through the adoption of a new enforcement policy by the federal antitrust agencies. A more recent proposal motivated less by a concern that common ownership generates competitive harm and more by the interest served in providing investors with litigation certainty would create an antitrust safe harbor for investors who limit their holdings below a particular threshold amount, refrain from board representation, and only engage in ordinary corporate governance activities.
In order to capably assess whether common ownership actually poses a significant antitrust concern and to formulate sound antitrust policy, it is necessary to have a sufficiently developed understanding of whether and the circumstances under which common ownership can generate harm to competition in a given market. Analysis of competitive effects underlies all of antitrust law. However, because common ownership until very recently was not an active object of scholarly antitrust research, the economic and legal literature has relatively little to say about the competitive effects of common ownership compared to cognate sources of potential competitive harm, such as mergers and firms’ partial acquisitions of rivals, which have both been the source of considerable legal and economic analysis and, especially in the case of mergers, a robust body of case law and agency consent orders. The relative lack of attention to developing a comprehensive understanding of common ownership’s competitive effects is an impediment to devising good antitrust policy.
This article takes an important step in filling this gap in the literature by conducting a systematic analysis of the competitive effects of common ownership. The article presents a number of key findings concerning common ownership and antitrust.
As a preliminary matter, it is generally understood that common ownership can potentially generate competitive harm. The basic intuition is that if a firm’s shareholders have ownership interests in a rival firm, then a decrease in the intensity with which the firm competes increases its rival’s profits, which are ultimately returned back to the firm’s shareholders through their ownership interests in the rival. In other words, common ownership can incentivize a firm to trade off its profit for the profit of its rival, which can cause the firm to compete less intensely, resulting in higher prices and competitive harm. This potential harm to consumer welfare is a unilateral effect (i.e., non-collusive price increases by the firms subject to common ownership) that arises because of changes in pecuniary incentives, apart from common owners exercising any control of or communicating with the firms in which they invest, though any such control or communication can amplify the potential competitive harm. Common ownership also may potentially generate competitive harm through coordinated effects (i.e., collusive conduct or tacit coordination by firms in the relevant market).
The potential for competitive harm, however, does not answer the ultimate question of interest—whether, and under what circumstances, common ownership actually will substantially lessen competition in a given market. This article shows that there is no simple answer to this question. Instead, whether and the extent to which common ownership will result in competitive harm depends on numerous factors, such as the nature and extent of common ownership in the relevant market, the structure of the market, shareholder incentives, managerial objectives, and other factors.
For example, the extent of the competitive effects of common ownership will depend critically on the structure of the relevant market. The competitive effects of common ownership in a market where all products are close substitutes will differ from the competitive effects of the identical configuration of common ownership in a market where only some products are close substitutes or are homogeneous. Or if only some shareholders have concurrent interests in a rival firm, shareholders’ incentives will be unaligned, in the sense that the common owners generally will prefer a reduction in competition, all else equal, but the non-common owners may not. These divergent incentives may act to restrain the firm from curtailing competition in response to some shareholders having ownership interests in rival firms. Nor will common ownership necessarily amplify the incentives or ability for coordinated conduct. 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 effectively punish deviations from the collusive agreement. And, while market efficiencies and entry potentially may ameliorate some or all of the anticompetitive effects of common ownership, the extent of such efficiencies or entry depends on the particular circumstances.
As the article explains, there are many other reasons why common ownership may ultimately generate de minimis competitive effects in a given market. For this reason, the mere fact that institutional investors’ significant equity holdings generate high levels of common ownership is by itself insufficient to conclude that this common ownership is generating substantial harm to competition 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 disregard common ownership, only that there is no economically sound basis to conclude that common ownership necessarily results in substantial competitive harm.
In addition, this article also shows that the modified concentration metrics in many instances may not accurately reflect common ownership’s actual competitive harm. As is made clear in the paper in which the MHHI is formulated, the MHHI is derived from an economic model that is predicated on certain underlying assumptions, as is the case with all economic models. If the actual characteristics of the market do not sufficiently match the assumptions of the model, the MHHI may not necessarily serve as a good gauge of competitive harm.
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