Horizontal Shareholding (Common Ownership)

Overview

Horizontal shareholding (also called common ownership) describes the situation in which a small number of large diversified institutional investors — chiefly index funds — simultaneously hold substantial equity stakes in most or all of the major competitors within a concentrated industry. Because these investors profit from the industry's aggregate returns rather than any single firm's market share, they are argued to have reduced incentives to reward aggressive price competition between the firms they jointly own, and some managers may internalize this incentive even without explicit coordination. The empirical case is most developed for the U.S. airline industry: economists José Azar, Martin Schmalz, and Isabel Tecu found that increases in common ownership across airlines were associated with higher ticket prices on overlapping routes, with subsequent literature debating an effect on the order of several percent.[1]

Eric Posner and Glen Weyl treat horizontal shareholding as a distinct category of rent extraction in Radical Markets (2018), devoting a chapter ("Dismembering the Octopus") to proposing an antitrust-style "Disruptive Antitrust" remedy that would cap the stakes any single institutional investor may hold across competing firms in concentrated industries, forcing funds to choose between diversification and cross-firm influence.[2] The argument treats the phenomenon as a distinct, more contested addition to the broader family of concentrated-ownership rents — closer to a monopoly problem than to the classical, textbook case for taxing land rent, and the underlying empirical finding remains actively disputed among economists (see "Why It Is Contested" below).

Why It Is Contested

The empirical common-ownership literature that followed Azar, Schmalz, and Tecu's original study has produced substantial disagreement: several later papers using different data or methodology found smaller or statistically insignificant price effects. Most prominently, Dennis, Gerardi & Schenone (2022) reexamined the airline data and concluded that "common ownership does not have anticompetitive effects," attributing the original result to the way the common-ownership variable was constructed and to reverse causality; Azar, Schmalz & Tecu have in turn issued a refutation, and the exchange remains unresolved.[3] Critics have also questioned whether fund managers at firms like Vanguard or BlackRock have the ability or the incentive to actively influence pricing decisions at portfolio companies they hold only passively. This makes horizontal shareholding a considerably more contested case than land rent capture — the underlying causal mechanism by which diversified, largely passive index-fund ownership would translate into coordinated pricing behavior is not settled, and reported effect sizes vary widely across studies and industries.

See Also

• Azar, Schmalz & Tecu (2018): Anticompetitive Effects of Common Ownership — the primary empirical paper behind the airline common-ownership finding this page cites
• Radical Markets — Posner and Weyl's book, which proposes "Disruptive Antitrust" as a remedy for horizontal shareholding
• Rent-Seeking — the broader category of value capture without production that horizontal shareholding is argued to exemplify
• Economic Rent — the general concept of unearned income from control of a scarce position, here applied to concentrated cross-firm ownership rather than land
• Land Monopoly — the classical, airtight case of rent from exclusive control that horizontal shareholding is argued to resemble in form but not in evidentiary strength

Sources

1. José Azar, Martin C. Schmalz & Isabel Tecu, "Anticompetitive Effects of Common Ownership," Journal of Finance 73(4), 2018 — used for the original airline-industry finding linking common ownership to higher ticket prices. Free version: papers.ssrn.com/sol3/papers.cfm?abstract_id=2427345
2. Eric A. Posner & E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society (Princeton University Press, 2018), Ch. 4 ("Dismembering the Octopus") — used for the "Disruptive Antitrust" proposal. The book's own price-effect figures derive from Azar, Schmalz & Tecu (source 1); this page states the magnitude only at the hedged level that primary paper supports ("several percent"), rather than reproducing the book's table. wiki book page
3. Patrick J. Dennis, Kristopher Gerardi & Carola Schenone, "Common Ownership Does Not Have Anticompetitive Effects in the Airline Industry," Journal of Finance 77(5), October 2022, pp. 2765–2798. DOI: 10.1111/jofi.13176 · free PDF — used as the representative post-2018 study disputing the Azar-Schmalz-Tecu airline finding on data-construction and reverse-causality grounds; AST's response is their "A Refutation…" (SSRN 4158149).