There has been a lot written recently about the forces that have led us to the current “winner-take-all” economy, or what some have called a new, “gilded age,” a reference to the time when a handful of large “trusts” dominated their respective industries. Most seem to blame the lack of antitrust enforcement and growing corporate influence in Washington and these have obviously played a role. However, there are a pair of far less obvious forces at work in the markets that may have had just as much influence in this regard.
Harvard Business Review recently tackled the topic of growing corporate concentration and anti-competitive behavior as it relates to the rise of passive investing. They demonstrate that the rapid growth of common ownership of multiple companies in the same sector has supported the rise of oligopolies and enabled anti-competitive behavior across a number of industries.
Horizontal shareholding hurts competition because it reduces “each individual firm’s incentives to cut prices or expand output by increasing the costs [to shareholders, and thus managers] of taking away sales from rivals.” https://t.co/wq9hXLCZKM pic.twitter.com/71r5bomeGn
— Jesse Felder (@jessefelder) February 20, 2019
Similarly, a new research paper finds that low interest rates, such as those enabled by the world’s major central banks over the past decade, also encourage the sort of corporate concentration that allows for anti-competitive practices.
This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. https://t.co/oKC6iVrCag cc @jtepper2
— Jesse Felder (@jessefelder) February 18, 2019
These two pieces of information are especially important for investors because they give a pair of new targets to those railing against what they see as the ills of our current form of capitalism. To the extent these folks are able to affect policy, both passive investing and activist monetary policy are at risk of both a social and political backlash. And I’m sure you can imagine what their success might mean for the markets.