Ep35 “Does Common Ownership Affect Product Market Outcomes?” with Martin Schmalz

TL;DR

A study explores the relationship between common ownership by large asset management firms and the pricing strategy of airlines, suggesting that higher common ownership leads to higher ticket prices.

Transcript

[MUSIC] Hi, I'm Jonathan Burke, professor of finance at the Graduate School of Business at Stanford University. >> And I'm Jules van Binsbergen, a finance professor at the Wharton School of the University of Pennsylvania. >> And this is the All Else Equal podcast. >> Welcome back, everybody. Today, we're going to talk about one of the most surprisi... Read More

Key Insights

• 🥺 The growth of intermediaries in the investment industry has led to greater concentration of ownership among a few large asset management firms.
• ✋ Higher common ownership by these firms is associated with higher ticket prices on certain routes in the airline industry.
• 🤨 The study raises concerns about the potential impact of common ownership on competition and consumer welfare.
• 🧑‍🏭 Common ownership is not the only factor influencing pricing strategies in product markets, but it is a significant factor that merits further investigation.
• ✊ The study highlights the need to consider the concentration of power among asset management firms and its potential implications for market dynamics.
• ™️ There is a trade-off between the benefits of diversification and the potential downsides of common ownership in product markets.
• 👮 Antitrust laws may need to be reevaluated to address the issue of common ownership and its impact on competition.

Questions & Answers

Q: What is common ownership and why is it important?

Common ownership refers to the situation where multiple asset management firms own shares in the same companies. It is important because it can potentially impact competition and pricing strategies in product markets.

Q: How did the study measure common ownership and its impact on airline ticket prices?

The study measured common ownership by analyzing the ownership stakes of asset management firms in different airlines. It found that higher common ownership was correlated with higher ticket prices on certain routes.

Q: What are the potential implications of the study's findings?

The study suggests that common ownership by large asset management firms could lead to reduced competition and higher prices in product markets. This raises concerns about the concentration of power among these firms and the potential impact on consumer welfare.

Q: Is common ownership the only factor influencing ticket prices in the airline industry?

No, common ownership is just one factor that can influence ticket prices. Other factors, such as competition levels and market dynamics, also play a role in determining pricing strategies.

Summary & Key Takeaways

• The majority of corporate equities in the United States are now held by institutional investors, such as mutual funds, ETFs, and pension plans.

• The rise of intermediaries in the investment industry has led to concentration among a small group of large asset management firms, such as BlackRock and Vanguard.

• A study conducted in the airline industry shows that higher common ownership by these asset management firms is associated with higher ticket prices on certain routes.