Capitalism and competition

As PIRC Alerts readers will know more than most, there’s a lot of talk about capitalism these days. The rise of populist politics of Right and Left, the shock of Donald Trump’s election in the US, and of Brexit in the UK, have led to more questioning of our economic model than has occurred for decades.
A significant theme in this discussion has been the focus on the extent of competition within industries. Although textbook economics tells us that competition is the name of the game, in Actually Existing Capitalism this is less clear. Tech companies come most easily to mind – when was the last time you used an online retailer other than Amazon, or a search engine other than Google? Or look at the US airlines, now in many respects a group of regional monopolies (which is why Warren Buffett likes them). And in the governance world, what is the audit market if not an oligopoly?
Why does it matter? The classic economist’s answer has always been that this is because it gives firms greater pricing power – in other words they can get away with charging more money. When markets are highly concentrated, and/or there are suspicions of collusion between firms, this is typically where competition or anti-trust authorities become involved. And it’s notable that rumours of potential anti-trust moves against the big tech firms have given investors a few wobbles lately.
But there’s a potential problem with some investors themselves. One issue that has started to bubble up recently is common ownership within concentrated industries. With the continuing rise of passive management, this is becoming more widespread. For example,one study found that in the US the average proportion of shares of the S&P 500 held by the Big 3 passive managers – BlackRock, Vanguard and State Street – has risen from 9.1% in 2002 to 18.4% in 2018. Some worry that the combination of oligopoly and common ownership is bad news for customers.
For example, In The Myth of Capitalism, Jonathan Tepper and Denise Hearn argue: “In a situation with horizontal share ownership, where firms are trying to please the same owner, firms can tacitly collude to maintain high corporate profits by swelling total industry performance. Investors make money when the industry (not individual companies) makes money. The easiest way to do this is to raise consumer prices.”
This is a complicated issue, and the argument is not that investors are colluding. Our experience of passive managers does not lead us to the conclusion that the problem is that they intervene in investee companies too much, quite the reverse (see Blackrock’s role at Carillion, for example). So there’s a danger that an oligopoly plus a commanding block of large, inert owners does lead to the kind of gouging that Tepper and Hearn warn of. That in turn could mean, as the tech stock wobbles suggest, that more there is a latent financial risk to investors from more assertive anti-trust activity.
It’s an unusual point, but as both market concentration and ownership grow, it may become heard more often, and it might be more costly if it is tackled.

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