Tuesday, August 22, 2017
John Woodbury, CRA asks Can Institutional Investors Soften Downstream Market Competition?
ABSTRACT: Recently, a number of papers have noted the dramatic increase in the extent to which institutional investors account for the ownership of publicly-traded stock, including holding ownership stakes in multiple market rivals. This change, in turn, has raised the intriguing or disturbing possibility that large institutional investors have used their influence to discourage aggressive rivalry among competitors. Indeed, two papers have developed evidence of such reduced rivalry in the airline and banking industries. If generally true, this evidence could lead to a radical reset of antitrust enforcement policy. This paper considers the original conclusions of these two papers and reviews the potential conceptual and empirical flaws in the analysis. While the evidence is still too sparse to justify antitrust action on this front, there can be little doubt that more research should be pursued to further validate (or not) the effect of institutional investors on market rivalry (and so prices). If so validated, then antitrust policy may well need to hit the "reset" button.