Common Ownership: When Index Funds Own Every Competitor

Einer Elhauge's Harvard Law work and Jose Azar's empirical research established that the same institutional investors — Vanguard, BlackRock, State Street — hold large stakes in most direct competitors in major US industries. The competitive implications are contested. The empirical finding is not.

BlackRock, Vanguard, and State Street together hold roughly 20-25% of the equity in most large US public companies. Through their index funds, they are simultaneously the largest shareholders of all the major airlines, all the major banks, all the major consumer-products firms. This is the "common ownership" phenomenon, and the antitrust-economics literature on what it means has grown rapidly since 2014.

The Posner-Scott Morton-Weyl Argument

The 2014 paper by José Azar, Martin Schmalz, and Isabel Tecu documented that airlines with overlapping ownership charged higher fares on routes where they competed, controlling for other factors. The mechanism: if a single shareholder owns substantial stakes in multiple competitors, the shareholder has no interest in vigorous competition among them. Management at each firm, beholden to the common shareholders, has reduced incentive to compete aggressively. The result is supra-competitive prices that would not occur with fully separated ownership.

Eric Posner, Fiona Scott Morton, and Glen Weyl extended this into a broader argument in a 2017 paper. They argued that institutional common ownership constituted an "anticompetitive horizontal merger" by proxy, and proposed legal responses: limiting institutional investors to either passive index funds in a single firm per industry, or active funds in a diversified portfolio. The most aggressive form of the proposal would have substantially restructured the index-fund industry.

The Empirical Pushback

The Azar-Schmalz-Tecu airline finding has been contested. Several subsequent papers (Kennedy, O'Brien, Song, Waehrer 2017; Edmans, Levit, Reilly 2019) found weaker effects or methodological issues that weaken the original finding. The economics-of-the-firm literature has not settled on a consensus about how strong the common-ownership effect actually is.

The theoretical mechanism is also contested. If managers maximize their own firm's profits, they should compete aggressively regardless of shareholder overlap, because their own bonuses and stock-grant values are tied to their own firm. The common-ownership argument requires that shareholder pressure for less aggressive competition actually influences manager behavior, which is harder to establish empirically.

The Voting and Engagement Question

Index funds historically did not vote actively in proxy elections. That has changed since roughly 2015. BlackRock's annual letter from Larry Fink to CEOs has become a substantial governance document. Vanguard, more reluctantly, has expanded its stewardship operations. State Street has been the most active of the three.

The empirical question is whether this voting and engagement actually moves firm behavior, and in what direction. The evidence is mixed. On environmental and social issues, the big three have voted with management about 80-90% of the time but have occasionally tipped close votes in favor of climate-related shareholder proposals. On competition-related issues, they have been more reluctant to intervene explicitly, partly because doing so would attract antitrust scrutiny that the firms want to avoid.

The Concentration of Voting Power

The structural concern, independent of whether current behavior is anticompetitive, is the concentration of voting power. The big three together control roughly 25% of votes cast in S&P 500 proxy elections. Among the largest pension funds and sovereign wealth funds, an additional 15-20% is concentrated in fewer than fifty institutions. This means that effective shareholder control of large US corporations is held by perhaps a hundred institutions, often passive and profit-aligned rather than actively engaged with corporate strategy.

This is structurally different from the dispersed shareholder model that mid-twentieth-century corporate-governance theory assumed. The implications for corporate behavior, executive compensation, capital allocation, and political-economic concentration are substantial. Whether they are net positive or negative depends on how the concentrated shareholders use their power, which is empirically underdetermined.

The Climate and ESG Dimension

The big three's stewardship guidelines have included climate-related expectations for years. BlackRock's 2020 climate-disclosure expectations were the most aggressive. The 2022-2024 backlash from Republican-led states — anti-ESG laws, state pension fund withdrawals, attorney-general investigations — has produced visible retrenchment. BlackRock has softened its public climate stance, voted with management more often, and withdrawn from some climate-related industry initiatives.

This illustrates a structural feature of common ownership: the institutional investors have to balance their stewardship responsibilities against political-economic pressure from their diverse constituencies (employers, public pension boards, retail investors). When the political pressure shifts, the stewardship shifts. Whether this makes the institutions more or less aligned with long-run shareholder interest is a debate without a clean answer.

The Antitrust Response

The DOJ and FTC have not so far brought a major case based explicitly on common-ownership theory. The proof of anticompetitive effect is harder than for explicit merger cases, and the legal theory has not been tested in court at scale. The 2023 merger guidelines incorporated common-ownership analysis in a more measured form, treating it as a factor in the broader assessment rather than as an independent ground for action.

The European competition framework has been somewhat more active. The EU's analysis of pharmaceutical patent settlements and platform markets has incorporated common-ownership concerns more explicitly, though without producing a clean enforcement framework.

The Honest Reading

Common ownership is a real and growing feature of modern capital markets. Whether it produces measurable anticompetitive effects is contested empirically; the original strong claims have been weakened by subsequent work but not refuted. The structural concentration of voting power is uncontestable and has implications that go beyond the specific question of whether common owners produce higher prices in specific markets. The antitrust-policy response so far has been measured rather than aggressive. The deeper political-economy question — what does it mean when a handful of institutional investors collectively hold a substantial share of all major US corporations — is one that the legal and political frameworks have not yet caught up to. The trend is unlikely to reverse on its own; institutional responses, when they come, will probably come slowly.

The Structural Trajectory

The concentration of voting power in a handful of institutional investors is unlikely to reverse on its own. Index-fund growth, asset- manager consolidation, and the structural advantages of scale in asset management all push toward continued concentration. Whether the institutional architecture adapts to this — through stewardship requirements, antitrust constraints on common ownership, or alternative governance structures — is the long-run institutional question. The political coalition for action exists in academic and some policy circles; the legislative coalition has not yet materialized.