A Development in Common Ownership: How Intra-Industry Diversified Shareholders Can Create Anticompetitive Incentives in the Airline Industry

Abstract

In economics, competition between firms in an industry – i.e., competition to maximize market share – traditionally, is beneficial for the consumers. Competition causes firms to develop new products and services while undercutting their competitors’ prices to gain market share by attracting more customers. In economic theory, firms in a competitive industry produce – and have incentive to produce – the socially optimal output level at the minimum possible cost per unit. In today’s economy, in addition to considering their own interests, many firm’s must also consider shareholder value – i.e., the value enjoyed by each of their shareholders; and in a lot of cases, this is the ultimate measure of a company’s success. Given that, if every firm competing in an industry had distinctly different shareholders, the optimal price competition strategies would align properly with each respective shareholders’ interests.

In the recent decades, the share of stock that is partially owned by institutional investors has increased substantially – and because of this, many natural competitors are owned by a small set of large institutional investors (intra-industry diversified shareholders). This common ownership, implicitly, changes the objective function of firm managers, as they now must consider that some of their largest shareholders also have ownership rights in their competitors. In order to quantify the extent of common ownership in the airline industry, this paper constructs a measure for total market concentration denoted as the modified Herfindahl-Hirschman Index (MHHI). This index is used as a reduced form measure of the decrease in incentives to compete due to common ownership.

This paper applies previous economic theory/literature with distinct empirical evidence to show that the MHHI is strongly correlated to the markups of airline companies between 2010-2019. Additionally, given the results displayed, antitrust regulators and authorities must consider common ownership when quantifying the market concentration measures; because ultimately, stock acquisitions by shareholders that are intra-industry diversified, can create anticompetitive incentives that result in a deadweight loss for society and bear a heavy the cost on consumers.