Traditionally, economists have believed that higher prices result from concentration within a consumer market. If one airline has monopoly power over a particular route, the price of a ticket will be high. Likewise, in many cases, prices rise after two airlines merge. For decades, this kind of industry-focused thinking dominated the debate about antitrust enforcement.
The common-ownership argument is different. Instead of looking at the number of companies in a market, it looks at the number of major shareholders those companies have in common. This argument doesn’t obviate the old concerns, but rather adds to them. It suggests an economy in which the incentives for companies to compete and to innovate are smaller than Americans might typically believe, and the opportunities to gouge customers larger. Both market concentration and common ownership have increased in the U.S. over the past two decades, a time that coincides with a slowdown in economic growth. No one would claim this is simple causation—growth results from a complex alchemy of factors. Yet there is no denying that consumers themselves seem unhappy about their treatment by big firms—airlines, banks, insurance companies, cellphone providers, pharmaceutical manufacturers—or that the economy appears sclerotic.
Azar, Schmalz, and Tecu’s paper went viral among academics, launching a whole new field of inquiry and many heated debates. An array of new research blames common ownership for various ills, including high bank fees and stratospheric CEO pay. At the annual meeting of the American Law and Economics Association, in May, common ownership was the subject of multiple presentations and nonstop chatter. Various remedies have already been proposed, some of which are punitive. One journal article argues that large index funds are violating antitrust law; another recommends a limit on index funds owning stock in more than one company in an industry. No one expects these ideas to lead to political action under the current presidential administration, but they are gaining traction among Democratic lawmakers.
The obvious question, of course, is how, exactly, common ownership would encourage these ills. Would common owners actually pressure company managers to collude and raise prices? Would those managers, facing less investor pressure, simply stop competing so hard with one another, enjoying fat paychecks and allowing prices to float up and cost-saving innovation to wither? And would any of that plausibly happen when index funds own just 15 percent of an industry?
Not surprisingly, the managers of index funds have thrown cold water on these possibilities, and on the empirical research itself. In March, BlackRock published a 24-page missive on common ownership, disputing much of the evidence and many of the claims. The analysis—echoed by other critics, including many academics—finds unconvincing, for instance, the airline paper’s claim that higher fares were “a direct result” of the 2009 merger between BlackRock and Barclays Global Investors (which increased BlackRock’s share of airline stocks by only a few percentage points). I spoke with several senior executives at Vanguard who likewise expressed skepticism. They denied any attempt at collusion, and underlined their hands-off approach to investing: One reason Vanguard is able to charge such low fees is that it doesn’t expend a lot of resources investigating individual companies or meeting with managers. Vanguard does have some actively managed funds and a “stewardship group” that meets with hundreds of companies about corporate governance, but its index-fund managers don’t engage with companies about their businesses. If they did so, they’d have to change their investment guidelines and make thousands of new regulatory filings.