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New Developments in Competition Policy

Final Report Summary - COMPPOL (New Developments in Competition Policy)

What is the effect of financial ownership structure on product markets? Academic studies normally abstract from financial structures by assuming that each firm in an industry is owned by a separate owner, whose objective is to maximize the profits of the firm. Thus, any given firm is in direct competition with all the other firms in the industry. In practice, however, ownership of publicly traded companies is owned by shareholders. These shareholders, especially when being institutional investors such as BlackRock, usually hold diversified portfolios and often hold shares in most of the important firms in an industry. The explosive rise in equity markets of these institutional investors may be a worry for competition in product markets.

This project studies the implications of these portfolio holdings of institutional investors for outcomes in oligopolistic industries, both from a theoretical and an empirical point of view. The first contribution is to develop a theoretical model of oligopoly with shareholder voting. Instead of assuming that firms maximize profits, we model the objective of the firms as determined by the outcome of voting by their shareholders that may own shares in several companies at once. This has as implication that when shareholders vote on the policies of a particular company, they take into account the effect of those policies not just on that company's profits, but also on the profits of the other companies that they hold stakes in. We show that in several types of product market competition, portfolio diversification may lead to outcomes that are anti-competitive.

These results, thus, indicate that assessing the potential for market power in an industry can be misleading if one does not, in addition, pay attention to the portfolios of the main institutional investors in the industry. Indeed, diversification acts as a partial form of integration between firms. While competition policy usually focuses on mergers and acquisitions, which are all-or-nothing forms of integration, it may be beneficial to pay more attention to the partial integration that is achieved through portfolio diversification by institutional investors.

The project then empirically explores the extent of common ownership induced by institutional investors for publicly traded corporations in Europe. To this purpose, we construct a network whose nodes are publicly traded European companies. The project explores the empirical relationship between markups and networks of common ownership. It is shown that industries with a higher density of common ownership networks within the industry have higher markups, which is consistent with the fact that portfolio diversification of large investors lead to industry outcomes that are anti-competitive.

While further more detailed research is needed and planned, these results strongly indicate that European competition authorities should take into common ownership structures when assessing the level of competition in European industries.