Podcast Summary: "What Happens When the Same Investors Own Competing Companies?"

Podcast Information:

• Title: Is Business Broken?
• Host/Author: Questrom School of Business
• Episode: What Happens When the Same Investors Own Competing Companies?
• Release Date: March 27, 2025
• Guest: Florian Ederer, Alan and Kelly Questrom Professor in Markets, Public Policy, and Law at BU Questrom School of Business

I. Introduction to Common Ownership

Kurt Nickish opens the episode by introducing the concept of common ownership, a situation where large investors hold minority stakes in multiple competing companies within the same industry. He poses critical questions about the implications of this phenomenon:

“When the same big investors buy stakes in multiple competing companies, are those firms still competitors? When they practically have the same owner, do they set their prices differently? Do they lose their drive to innovate?”
[00:00]

Florian Ederer joins the discussion to dissect what common ownership entails and its burgeoning presence in today’s market dynamics.

II. Defining Common Ownership

Florian Ederer clarifies that common ownership involves large investors, primarily asset management companies, holding minority interests across competing firms within the same industry. He distinguishes this from broader notions of shared ownership aimed at societal benefits.

“Common ownership refers to a situation where large investors hold minority interests in several companies competing in the same industry.”
[01:20]

III. Historical Context and Rise of Common Ownership

Ederer traces the common ownership hypothesis back to the 1980s, when concerns first emerged about its potential to dampen competition. However, he notes that its prevalence has surged dramatically in recent decades.

“This theory of common ownership started as early as the 1980s... But back then, common ownership wasn't all that common. It was not as widespread as it is now, almost 40 years later.”
[02:28]

The rise is attributed to the promotion of diversified investing by business schools and the accessibility of investment vehicles like index funds and mutual funds, which funnel investments through major asset management firms.

“We were very, very, very successful at convincing people to invest in a diversified way... When you do that, that means that you get a rise of diversified investments... they end up holding large shares of several firms that usually would be competing against each other.”
[03:14]

IV. Major Players and Scale of Common Ownership

The discussion highlights the dominance of the "Big Three" asset managers—BlackRock, Vanguard, and State Street—which collectively hold significant stakes in over 80% of publicly listed U.S. companies.

“If you look at the overall Trend Nowadays, over 80% of all companies that are publicly listed in the United States tend to have an owner that's one of the big three.”
[06:00]

Other notable players like Fidelity also contribute to this landscape, further consolidating ownership across various industries.

V. Effects on Competition and Pricing

Ederer delves into the core concerns of common ownership: its impact on competition and consumer prices. Citing empirical research, he explains how shared ownership can lead to higher prices due to reduced competitive pressures.

“If you represent a lot of shareholders in Coca Cola and Pepsi Cola, then you basically aren't going to pressure one of them to lower their prices... you would rather see both companies keep their prices higher and make more money across the market because you own that market.”
[10:57]

Using the airline industry as a case study, Ederer references a 2018 study demonstrating that routes with higher common ownership experience elevated ticket prices compared to less commonly owned routes.

“They showed that on airline routes where you have more common ownership... ticket prices tend to be higher...”
[12:10]

VI. Impact on Innovation

The conversation shifts to the nuanced effects of common ownership on innovation. Ederer acknowledges that while reduced competition might dampen aggressive innovation aimed at outperforming rivals, shared ownership can also facilitate positive spillovers from collaborative advancements.

“Common ownership would actually have a beneficial effect on innovation...”
[20:16]

He provides examples from the pharmaceutical and technology sectors, where shared investor interests can either stifle competitive innovation or promote collaborative progress benefiting the broader industry.

VII. Economic and Social Implications

Ederer discusses the broader economic ramifications, highlighting a significant deadweight loss attributed to common ownership—estimated to reach 13% of total surplus by 2021. This loss primarily affects consumers through higher prices and reduced product quality, while investors enjoy increased profits.

“The losses to consumers are larger than the profit increases for the investors. So it's literally just putting the losses in consumer surplus and the gains in profits together we show that in sum, that... deadweight loss is as large as 13% of total surplus.”
[23:19]

Furthermore, common ownership contributes to income and wealth inequality, as the benefits disproportionately favor wealthier individuals who are more likely to invest in these diversified funds.

“Higher common ownership leads to increased income and wealth inequality.”
[28:26]

VIII. Regulatory Landscape and Future Directions

Ederer addresses the regulatory responses to common ownership, noting that recent merger guidelines (2023) have begun to acknowledge and address the anti-competitive effects of shared ownership. He also mentions ongoing antitrust lawsuits targeting major asset managers like BlackRock.

“The most recent merger guidelines from 2023 have... specifically about common ownership... it's great to see that policy has taken this up quite quickly.”
[25:24]

Looking ahead, Ederer expresses skepticism about the market’s ability to self-correct and anticipates more substantial policy interventions. He highlights the challenges in balancing investor interests with consumer protection and underscores the necessity for continued regulatory vigilance.

“Policy response tends to be slow here in this case... but I think there's absolutely going to be more policy response.”
[30:30]

IX. Conclusion

The episode concludes with a reflection on the historical parallels of common ownership, drawing comparisons to the Gilded Age's monopolistic practices. Ederer’s insights emphasize the critical need for ongoing research and policy reform to mitigate the adverse effects of common ownership on competition and consumer welfare.

“Overall, it sounds like common ownership would only be more likely to contribute to income inequality than reduce it.”
[28:18]

Kurt Nickish wraps up the discussion, inviting listeners to follow future episodes for more in-depth conversations on the evolving role of business in society.

Notable Quotes:

• “When the same big investors buy stakes in multiple competing companies, are those firms still competitors?...”
  — Kurt Nickish
  [00:00]

• “Common ownership refers to a situation where large investors hold minority interests in several companies competing in the same industry.”
  — Florian Ederer
  [01:20]

• “The losses to consumers are larger than the profit increases for the investors...”
  — Florian Ederer
  [23:19]

• “Higher common ownership leads to increased income and wealth inequality.”
  — Florian Ederer
  [28:26]

This episode of Is Business Broken? provides a comprehensive exploration of common ownership, highlighting its origins, expansive growth, and multifaceted impacts on competition, innovation, and societal inequality. Florian Ederer’s expert analysis underscores the urgent need for policy interventions to safeguard consumer interests in an increasingly interconnected investment landscape.