Bloomberg’s Matt Levine posed a pretty interesting question in the latest Money Stuff newsletter. He asked: Should index funds be illegal?
Columbia’s Menesh S. Patel conducted an analysis of the competitive effects on common stock ownership in a recently published academic paper. Patel concluded that while institutional investors’ substantial stock holdings could be harmful to competition, the extent of the damage caused by common stock ownership should be evaluated on a case-by-cases basis. In a recent blog post he wrote:
Accordingly, as the article shows, while common ownership potentially can generate substantial competitive harm, whether it will actually do so in a given market will depend on the circumstances. For instance, common ownership may cause substantial competitive harm if the firms’ products are homogeneous or close substitutes for each other but not if the products are poor substitutes. As another example, while common ownership may increase the likelihood of collusion by making it easier for firms to form or monitor a collusive agreement, common ownership may also decrease the likelihood of collusion by making it harder for firms to punish deviations from the collusive agreement.
Yes it’s all theoretical now, but the issue could be more meaningful someday.