Does Common Ownership Explain Higher Oligopolistic Profits?

Abstract

The stylized fact that grounds much of the recent literature on common ownership is the parallel increase in the profitability of oligopolistic industries and common ownership. Some have argued that the growth in common ownership has caused the increase in oligopoly profits and have proposed a variety of policy responses. This paper briefly reviews the available evidence and finds it unconvincing. It then provides an overview of the evidence that concentration and profitability have increased, considers alternative explanations, and suggests that the emergence of “superstar” firms -- and not the growth in common ownership – is a fundamental driver of the parallel increase in concentration and profitability.

Keywords: common ownership, corporate governance, Index funds, passive investing, active funds, institutional investors, coordinated effects, superstar firms, oligopoly profits

JEL Classification: K21, K22, L4, L40, L41