The Price of Consolidation

 The US economy has undergone profound consolidation over the years and it's a problem.

their rise has come at the cost of intense concentration in corporate ownership, potentially supercharging the oligopolistic effects of already oligopolistic industries.

John Coates, a professor at Harvard Law School, has written that the growth of indexation and the Big Three means that in the future, about a dozen people at investment firms will hold power over most American companies. What happens when so few people control so much? Researchers have argued that this level of concentration will reduce companies’ incentives to compete with one another. This makes a kind of intuitive sense: For example, because Vanguard is the largest shareholder in both Ford and General Motors, why would it benefit from competition between the two? If every company is owned by the same small number of people, why fight as fiercely on prices, innovations and investments?

Indeed, there is some evidence that their concentrated ownership is associated with lower wages and employment and is already leading to price increases in some industries, including in airlines, pharmaceuticals and consumer goods. The firms dispute this. In a 2019 paper, Vanguard’s researchers said that when they studied lots of industries across a long period of time, “we do not find conclusive evidence” that common ownership led to higher profits.

Einer Elhauge, also of Harvard Law School, has written that concentrated ownership “poses the greatest anticompetitive threat of our time, mainly because it is the one anticompetitive problem we are doing nothing about.”

the more money that BlackRock or Vanguard or State Street manages, the more it can lower its fees for investors. This makes it difficult for new companies to enter the business, meaning that the Big Three’s hold on the market seems likely to persist. “I do not believe that such concentration would serve the national interest,” Bogle wrote.

 policymakers will have to move carefully to manage the dangers of concentration without limiting the benefits to investors of these firms’ low-cost funds. “No doubt getting the balance right will require judgment and experimentation,” he wrote.