How Exactly Does Common Ownership Harm Competition? A Conversation with Florian Ederer, Jerry S. Cohen Award Winner for Antitrust Scholarship

Aug 14, 2024

In this conversation, Florian Ederer, an award-winning professor at Boston University, shares his groundbreaking insights on common ownership's impact on competition. He discusses how common ownership can weaken managerial incentives and lead to less competitive behavior in industries like airlines. The episode delves into the correlations between CEO compensation and ownership levels, revealing surprising findings about passive investors' influence on market dynamics. Ederer also addresses implications for antitrust policy, emphasizing the need for fresh approaches in this evolving landscape.

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INSIGHT

Common Ownership Concerns

Common ownership, where large investors own shares in competing firms, raises theoretical concerns about reduced competition.
Empirical evidence suggests that common ownership has anti-competitive effects, impacting prices and strategic choices.

INSIGHT

Mechanism of Influence

The mechanism by which common ownership leads to anti-competitive effects was unclear before Ederer's research.
It seemed unlikely that owners directly influenced CEOs' decisions, and there was vigorous debate on the mechanisms involved.

INSIGHT

Indirect Influence through Incentives

Ederer's paper proposes that common owners influence competition indirectly through managerial incentives.
Weaker CEO incentives lead to less efficient firms, which in turn leads to less aggressive pricing and higher industry profits.

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In this episode of Ruled by Reason, guest host Leslie Marx, the Robert A. Bandeen Distinguished Professor of Economics at Duke University’s Fuqua School of Business, sits down with Professor Florian Ederer to discuss his award-winning article, Common Ownership, Competition, and Top Management Incentives, 131 J. Pol. Econ 1294 (2023).

Professor Ederer is the Allen and Kelli Questrom Professor in Markets, Public Policy & Law at Boston University’s Questrom School of Business. His article, co-authored with Professors Miguel Antón and Mireia Giné of the IESE Business School and Martin Schmalz of the University of Oxford Saïd Business School, won the 22nd Annual Jerry S. Cohen Memorial Fund Writing Award, presented on May 22 at AAI’s 2024 Annual Policy Conference, New Thinking on the Antitrust Treatment of Collective Action: Organized Labor, Countervailing Power, and Algorithmic Price Setting. The article helps explain the existing empirical evidence on the anticompetitive effects of common ownership and meaningfully advances our understanding of the underlying theory behind the effects.

Among other things, Professor Marx and Professor Ederer discuss the theoretical and empirical background behind the theory of anticompetitive effects from common ownership (5:06), the mechanism by which common ownership actually leads to anticompetitive effects, notwithstanding that top managers and their delegees (rather than investors) control firms (12:13), and the implications of these findings for enforcers, policymakers, and future research (26:09).

Antitrust scholarship that is considered and selected for the Jerry S. Cohen Award reflects a concern for principles of economic justice, the dispersal of economic power, the maintenance of effective limitations upon economic power or the federal statutes designed to protect society from various forms of anticompetitive activity. Scholarship reflects an awareness of the human and social impacts of economic institutions upon individuals, small businesses and other institutions necessary to the maintenance of a just and humane society–values and concerns Jerry S. Cohen dedicated his life and work to fostering.