Why Common Ownership Can Increase Competition

In recent years, there has been a significant increase in common ownership, where large institutional investors hold substantial shares in several companies within the same sector. Theoretically, common ownership may result in higher product prices, as common owners might favor anticompetitive strategies that enhance their portfolio’s overall value rather than optimizing the performance of individual companies. Critics contend that common ownership weakens market competition and harms consumers, calling for laws and regulations to curtail common ownership. Yet, this viewpoint neglects the potential positive externalities that can emerge from institutional investors owning shares in rival companies. The anticompetitive effects of common ownership need to be closely compared with the possible procompetitive benefits stemming from knowledge sharing and synergies among rival firms with common owners, as overlooking either side could result in flawed policies.

In competitive markets, the introduction of new (substitutable) products can decrease the market shares of existing offerings, potentially making them outdated and leading to their exit. Such 'business-stealing' effects are typically not factored into the calculations of the innovating company. When competitors are mostly owned by distinct groups of shareholders, pursuing aggressive innovation becomes appealing. However, when the same investors own stakes in both the innovating company and its rivals, these common owners might engage in strategies that limit competition to secure quasi-monopoly profits. This could be achieved through a tacit collusion among their portfolio companies, thereby softening competition and absorbing the negative impacts of business-stealing. This practice can deter new product introductions and may also result in fewer product discontinuations due to the reduced influx of innovative products.

This perspective, however, fails to consider how common ownership could actually spur innovation by streamlining collaboration among competitors and reducing duplication costs in innovation efforts. In environments with significant knowledge spillovers, companies might capitalize on the innovative efforts of their rivals to decrease 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, increased levels of common ownership might render companies more adaptable to shifts in the competitive environment and encourage 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 uncover 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. Though 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.

Delving deeper into the impact of increased common ownership on product innovation, I explore several dimensions, including market and industry characteristics that might influence how firms adjust their strategies to address business-stealing and knowledge spillover effects. I present three key findings. First, I find that the positive effects of common ownership on product entry and exit are less pronounced in more concentrated markets due to reduced spillover opportunities. This contrasts with the idea that greater product market concentration might encourage new product entry because firms with monopoly power are better able to appropriate the returns from innovation, even in the absence of knowledge spillovers. Second, firms in sectors requiring high investment and complex production processes might yield monopoly profits, as entering such markets demands substantial capital. Thus, changes in portfolio company incentives by common owners might have a negligible impact in product markets with high capital investment requirements. However, in markets with lower capital and monopolistic rent potentials, increased common ownership can lead to more frequent product introductions. Consistent with this reasoning, the findings indicate that the impact of common ownership is more pronounced for firms operating in product markets characterized by low intensity of capital investment. Third, I investigate how product similarity affects the relationship between common ownership and innovation, finding that higher substitutability among rival products amplifies both knowledge spillover and business-stealing effects, leading to a significant increase in both product entry and exit rates following a rise in common ownership. This indicates that, within similar product areas, the positive impacts of spillovers outweigh any negative effects caused by business-stealing effects.

Given that households with varying incomes have distinct preferences for goods and services, it’s expected that the process of creative destruction will have varied effects on them. Moreover, concentrating solely on average effects might obscure significant variations across the socioeconomic landscape. The findings indicate that the frequency of new product introductions and the novelty of these products tend to be higher for consumers with higher incomes than those with lower incomes. Additionally, I observe that the patterns of product discontinuation are relatively consistent across products, regardless of the income level of the consumer.

Overall my research highlights the procompetitive effects of common ownership, especially in product markets with strong knowledge spillovers. Prior research on anticompetitive effects of common ownership have ignited a debate on the antitrust risk posed by institutional investors, its legal implications, and potential solutions. Several regulatory bodies have considered limits on common ownership. This study offers a different perspective, emphasizing that anticompetitive price effects of common ownership should be weighed against procompetitive innovation effects in policymaking. The results, showing modest average impact, weigh against a one-size-fits-all antitrust approach towards common ownership. Any future policy debate and regulatory measure should consider both the industry structure and the firm’s product market characteristics.

Hadiye Aslan is an Associate Professor at Georgia State University’s J. Mack Robinson College of Business.

The author's article,  'Common Ownership and Creative Destruction: Evidence from US Consumers,' forthcoming in the Review of Finance, can be found here.

This post first appeared on Columbia Law School’s Blue Sky blog, available here.