In this installment of ProMarket’s interview series on concentration in America, Martin Schmalz from the University of Michigan talks about the effects of common ownership on concentration.
Does America have a concentration problem? On March 27-29, the Stigler Center hosted a first-of-its-kind, three-day conference in Chicago that focused on this very question.
The conference brought together dozens of top academics from law, economics, history, and political science, policymakers, journalists, and public intellectuals. Ahead of this conference, we presented influential scholars and thinkers with some questions on concentration, market power, and bigness—and their potential effects on the U.S. economy.
You can read all previous installments here.
Martin Schmalz is the NBD Bancorp Assistant Professor of Business Administration and Assistant Professor of Finance at the University of Michigan’s Ross School of Business. His research covers empirical and theoretical topics in industrial organization, corporate finance, behavioral finance, asset pricing, and financial economics. His recent studies on the effects that common ownership of natural competitors by large, diversified institutional investors has on corporate financial decisions and product market competition received wide media coverage.
In a brief interview with ProMarket, Schmalz shared some thoughts on concentration in the U.S and common ownership.
Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?
It is clear that various measures of concentration have increased over the past few decades. The debate is about whether those are economically meaningful measures—and if so, whether that increase in concentration is causally related to higher prices, more monopsony power and a lower labor share, less investment and growth, greater inequality, and so forth.
There is now an increasing number of empirical studies that indeed relate increased concentration to these outcomes (I am thinking of the work of Simcha Barkai, Germán Gutiérrez and Thomas Philippon, Bruce Blonigen and Justin Pierce; some of our own papers also fall in that category). By contrast, I have seen little recent evidence showing a causal link from increased concentration to greater economic efficiency.
What is “enough” evidence is of course subjective, and is asking for an overly general answer.
Q: In your opinion, what are the main reasons for the rise in concentration?
In no particular order:
1. Increased prevalence of winner-take-all markets, among others due to advances in technology and data processing, as well as network effects and vertical integration, as Lina Khan has argued.
2. Antitrust enforcement is perceived as relatively restrained in some areas by various experts (here is Einer Elhauge on ProMarket with a historical comparison; John Kwoka’s book is another great resource).
3. The rise of common ownership is potentially an equally potent reason for the rise in concentration. In the industries we studied most carefully, the increase in common ownership corresponds to an increase in concentration that several large mergers would create.
Q: Which industries should we be concerned with when we look at questions of concentration?
It’s a difficult question to answer, because you want to trade off precision with relevance. The industries our “common ownership” papers have studied at the market level are airlines and banks. To get a sense of the level of common ownership in those sectors, note that the top 10 owners of an airline often control more than 50 percent of voting shares and also own large blocks in competitors. The evidence that consumer prices are higher due to common ownership is fairly precisely estimated at the market level in these industries.
When you broaden the scope of the question to the general economy, the negative effect of concentration on investment is only feasible to estimate at the firm level (as Gutiérrez and Philippon have done). Moreover, much of the evidence that concentration has increased is at the (national) industry level. I think the broader scope in some studies and perhaps “cleaner” market-level estimates in others makes for a powerful combination.
I also wonder whether various macroeconomic trends should count as evidence of excessive market power or not. For example, Larry Summers believes that “only the monopoly-power story can convincingly [jointly] account” for the combination of high profits, low investment, and low real interest rates, but I haven’t seen a formal model that proves that point.
Q: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?
Let me limit my answer to consolidation in the asset management industry. The rise of common ownership is driven in part by mergers between very large asset managers, but also by the organic growth of particular forms of investment vehicles. These increases in common ownership concentration seem to be linked to increases in market power. (Our airline paper shows evidence that BlackRock’s acquisition of Barcl
ays Global Investors increased airline ticket prices; our paper on bank competition links the growth of index funds to higher prices for deposit products.) So yes, it seems that consolidation and concentration in the asset management industry indeed raises antitrust issues.
To give you some more background, Vanguard now manages $4 trillion worth of assets; BlackRock is at $5 trillion assets under management. Five thousand billion dollars is enough to buy a 10 percent stake of General Motors, 900 times in a row. When control over assets is so concentrated, it becomes difficult to prevent for the large asset managers to be the most powerful shareholder of a large number of firms, including many natural competitors. And their holdings come on top of targeted acquisitions of shares in natural competitors by investment vehicles that are an order of magnitude smaller, such as ValueAct or Berkshire Hathaway.
The potential antitrust problem posed by such common ownership links is fairly obvious: the value of a shareholder’s portfolio goes down when the portfolio firms compete more aggressively against each other. In the words of CNBC reporter Becky Quick: “You know, Warren [Buffet], it does occur to me, though, if you’re building up such a significant stake in all the major players, is that anything that’s, like, monopolistic behavior?“ The existing empirical evidence indicates that she has the right intuition here.
Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?
The potential link from concentration to economic inequality is mostly clear, if just because of the redistributive effect less competitive product markets can have. Jonathan Baker and Steven Salop and Einer Elhauge have written about it. A reverse link from economic inequality to concentration seems not unlikely, either: there is empirical evidence for the idea that economic inequality leads to unequal representation and political power, and Mara Faccio and Luigi Zingales’ latest work argues political power can translate into more market power. Increased monopsony power in the labor market could also contribute to greater inequality, and subject to ongoing research.