Thursday, February 1, 2018
Patrick J. Dennis, University of Virginia - McIntire School of Commerce, Kristopher Gerardi, Federal Reserve Bank of Atlanta, and Carola Schenone, University of Virginia - McIntire School Common have an important paper on Ownership Does Not Have Anti-Competitive Effects in the Airline Industry.
ABSTRACT: In many markets, institutional investors own significant equity stakes in multiple firms that compete in the same product market. A debate among legal and financial scholars has emerged on whether competitors with "common owners" have incentives to engage in anti-competitive behavior. This has generated proposed legislation to curtail the number of firms in the same industry that an institutional investor can hold. This paper revisits the empirical evidence on the relationship between prices and common ownership in the airline industry documented in Azar et al. (AST). We replicate the AST results and then test the robustness of their findings in five specific ways. First, we modify AST's specification to exclude regression weights. Second, we construct a data set using sample restrictions that are consistent with the existing literature on airline pricing. Third, we adjust cash flow and control rights of equity holders in carriers that operate under Chapter 11 Protection as they no longer retain a claim to the firms' assets. Fourth, we adjust the measure of control rights to apply only to shares for which the institutions have unique voting rights. Finally, we account for the endogeneity of market concentration and prices. In contrast to the findings in AST that greater common ownership leads to significantly higher average airline prices, our results suggest that there is no relationship between common ownership and prices in the airline industry.