The Biggest Antitrust Story You’ve Never Heard

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The Biggest Antitrust Story You’ve Never Heard

The rise of institutional investors threatens competition, hurts consumers, and might qualify as a new kind of monopoly.
Economist Fiona Scott Morton calls horizontal shareholding “the great, but mostly unknown, antitrust story of our time.” | Rueters/Lucas Jackson

There’s no question that institutional investors are on a steady, inexorable rise: Since 1970, the share of the American stock market owned by large investment firms has grown from 7% to 70%. Collectively, the three biggest private funds — BlackRock, Vanguard, and State Street — own more than any other single shareholder in 40% of the public companies in the U.S.

That means they are often the most influential shareholders of companies that are supposed to be in competition with each other: Microsoft and Apple. Citigroup and Wells Fargo. Walgreens and CVS. The list goes on.

Such “horizontal shareholding,” as it’s called, may erode competition, boost consumer prices, and possibly violate long-standing antitrust laws, says Fiona Scott Morton, an economist who recently visited Stanford Graduate School of Business as part of a program organized by the school’s Corporations and Society Initiative.

“You could argue that these mutual funds are a parallel to the trusts of the late 1800s that Congress passed laws to prevent,” says Scott Morton, a professor at Yale. An op-ed that she coauthored in the New York Times describes horizontal shareholding as “the great, but mostly unknown, antitrust story of our time.”

As major shareholders, institutional investors can have a strong influence over a given corporation’s business strategies, Scott Morton says. They have a say in a chief executive’s compensation package, and they often discuss business strategy with top-level managers.

Scott Morton points to two studies that show how horizontal shareholding has harmed consumers. One study found that airline ticket prices were higher by 10% because of such stock ownership, and another found that bank fees rose while interest rates dropped in the banking industry for the same reason.

A Legal Solution?

In the early 20th century, the public outcry against price fixing and excessive political influence created by American Tobacco, Standard Oil, and other monopolies spurred the Sherman Antitrust Act of 1890 and, 24 years later, the Clayton Act. Laws were passed to protect consumers against monopolies.

You could argue that these mutual funds are a parallel to the trusts of the late 1800s that Congress passed laws to prevent.
Fiona Scott Morton

Scott Morton acknowledges that today it would be a challenge to apply antitrust statutes to horizontal shareholding because the evidence drawing a connection between shareholder activism and a softening of competition between rival companies is nascent, and understanding of the mechanism of harm is still being researched. Nonetheless, she contends, it’s clear that the laws would apply.

The Clayton Act “does not insist on proof of the precise mechanism by which prices are increased,” she writes in a paper coathured by University of Pennsylvania professor Herbert Hovenkamp. “The statute says nothing about intent or state of mind.”

In other words, antitrust enforcers would need to show only a causal correlation — rather than some kind of malign intent — linking horizontal shareholding to an increase in consumer costs. But even so, Scott Morton says, a dismantling of this type of shareholding through the legal system isn’t likely to happen.

“This is not going to be solved with one-off lawsuits,” she says. “Suppose you sue Vanguard, and now Vanguard is not allowed to hold airline stocks. How does Vanguard compete with Fidelity? So then you say, ‘OK, Fidelity, you can't hold airline stocks either.’ But then, if the big mutual funds aren’t allowed to hold airline stocks, what does that do to the airline industry?

“At the end of the day, what we really need is a policy. We need to understand exactly where the harm comes from and build a policy for mutual funds that protects consumers from the lack of competition.”

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