Uncommon Implications of the Common Ownership Hypothesis

Abstract

One of the most pressing dilemmas facing consumer protection policy and corporate law is the common ownership problem – the idea that diversified investment products that help millions of consumers are indirectly making them worse off. The hypothesis states that when the same investment funds own sizable stakes in rival firms, those firms will have less incentive to compete with one another, leading to higher prices, lower wages and greater income inequality. We argue that current attempts to resolve the common ownership question are destined for stalemate because they are premised on a misunderstanding of the empirical evidence that frames the issue. The problem stems from a flawed measure of common ownership that drives the results of the empirical research on common ownership mechanically, rather than revealing anything about the underlying reality of the issue. We demonstrate this flaw by replicating the foundational “airline paper,” showing that a relationship between ownership and anticompetitive price increases can be obtained using completely random common ownership or low, presumably harmless levels of common ownership, in line with what some have proposed as a legal limit. We propose an alternative empirical and legal approach to the common ownership problem that empirically tests a set of logical implications of common ownership theory that have thus far been missing from the conversation. These implications entail empirical observations that should be surprising and uncommon absent the effects of common ownership. Specifically, if the economic theory that underpins the hypothesis is true, certain transactional forms in the life of a firm that are assumed irrelevant for consumers should have dramatic effects on consumer prices. For example, Mondelez’s decision to change a subsidiary’s on-paper nationality through a tax inversion would be expected to lower other companies’ coffee prices. And Proctor & Gamble’s decision to pay in stock instead of cash to acquire Gillette should cause unrelated third-party companies to sell cheaper batteries. We explain how predictions like these can guide legal research and empirical inquiry into common ownership’s effects, mechanisms and solutions.