Why Common Ownership Can Increase Competition

By: Hadiye Aslan (Oxford Business Law Blog)

In recent years, there has been a significant rise in common ownership, where large institutional investors hold substantial shares in multiple companies within the same sector. Theoretically, common ownership may lead to higher product prices as common owners might prefer anticompetitive strategies that boost their portfolio’s overall value rather than optimizing the performance of individual companies. Critics argue that common ownership weakens market competition and harms consumers, advocating for laws and regulations to curtail it. However, this view overlooks the potential positive externalities from institutional investors owning shares in rival companies. It’s crucial to balance the anticompetitive effects of common ownership against the possible procompetitive benefits from knowledge sharing and synergies among rival firms with common owners to avoid flawed policies.

In competitive markets, the introduction of new (substitutable) products can decrease the market shares of existing offerings, potentially making them obsolete and leading to their exit. Such ‘business-stealing’ effects are typically not considered by the innovating company. When competitors are mostly owned by different groups of shareholders, pursuing aggressive innovation becomes attractive. However, when the same investors own stakes in both the innovating company and its rivals, these common owners might limit competition to secure quasi-monopoly profits. This could be achieved through tacit collusion among their portfolio companies, softening competition and mitigating the negative impacts of business-stealing. This practice can deter new product introductions and may result in fewer product discontinuations due to reduced innovation.

This perspective, however, fails to consider how common ownership could spur innovation by streamlining collaboration among competitors and reducing duplication costs in innovation efforts. In environments with significant knowledge spillovers, companies might leverage the innovative efforts of their rivals to reduce their own innovation investments. Common owners, by absorbing involuntary spillovers, may mitigate the decreased motivation to innovate that arises from the business-stealing effect and the potential for winner-take-all scenarios among their portfolio companies. Therefore, by encouraging knowledge spillovers, higher levels of common ownership might make companies more adaptable to shifts in the competitive environment and promote more new product introductions.

Ultimately, how common ownership affects product innovation is an empirical question. In a recent paper, I compile a comprehensive panel dataset spanning from 2006 to 2019, which includes data on consumer products and the ownership structure of US public firms. The results reveal several key trends. Firms with more common ownership introduce new products more rapidly and phase out existing ones at a similar rate. Additionally, these firms experience higher net product creation and product turnover rates in the years following an increase in common ownership. Although baseline estimates for product exit rates are statistically insignificant, their economic and statistical significance grows over three years after an increase in common ownership. The data on product discontinuation show no decrease in product variety among firms, contradicting the argument that common ownership’s anticompetitive effects could lead competitors to segment the product market, essentially creating single-producer monopolies. My analysis of product data descriptions shows that, after an increase in common ownership, firms are introducing new products and discontinuing existing ones that are less similar to those of their rivals, resulting in more similarity among the products of different firms…

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