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The Rise of Institutional Investment in America and Its Adverse Impact on Competition

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The Rise of Institutional Investment in America and Its Adverse Impact on Competition

As the wages remained stagnant over the years while the corporate profits kept soaring, Mr. Trump capitalized on the ideal opportunity of channeling populist anger against big corporations. He also raised a question against mergers of big businesses such as AT&T and Time Warner, arguing that they resulted in a concentration of power in the hand of too few CITATION Pos16 \l 1033 (Posner, Morton, & Weyl, 2016). Although mergers do pose a threat to competition in markets, it is the lesser known astonishing rise of institutional investors over the years that pose the biggest threat to competitive markets. An institutional investor can be defined as a large company like an insurance company, a mutual fund company or an asset management firm, that purchases stock in very large quantities CITATION Jam19 \l 1033 (Chen, 2019). Institutional investors usually experience fewer protective regulations they are in a much better position to protect themselves. Types of institutional investment include endowment funds, mutual funds, pension funds, commercial banks, and insurance companies. From the 1950s to 2019, institutional investors have raised their share in the stock market from 7 percent to nearly 70 percent CITATION Pos16 \l 1033 (Posner, Morton, & Weyl, 2016). The largest companies who own nearly 88% stocks in the Standard % Poor’s 500 index are BlackRock, Vanguard and State Street. Some economist highlight that never has the US economy concentrated to this extent since the Gilded Age. This growing power has taken its toll on the middle-class living.

The problem with institutional investment is not the mammoth size of their investment only. Part of the problem is also the way they invest. What kills competition is the Institutional investors having stakes in all the competitor companies of a business. For instance, Vanguard alone is either the biggest or the second biggest investor in the banking sector. It owns assets worth $3.5 trillion in JPMorgan, Bank of America, Chase, Wells Fargo, PNC Bank, Citigroup, and U.S. Bancorp. This pattern recurs across the economic landscape of the U.S. Vanguard and BlackRock are not only the largest owners of Microsoft and Apple, but also among the top 3 owners of Rite Aid, and Walgreens. In GE, Whirlpool, and Electrolux, again, Vanguard, State Street and BlackRock are the largest owners. The same patterns appear to recur in all the major industries of the U.S. from airlines to soft drinks, and from insurance to infrastructure.

Economic theory is very clear on the impact of a single investor with substantial shares in competing companies. The investor in such instances can easily keep the prices high and wages low. The result is price-wage competition which lowers both stock values and profits CITATION Pos16 \l 1033 (Posner, Morton, & Weyl, 2016). If the institutional investors hold the stocks passively, they can reduce the competition. In the airline industry, ticket prices saw an increase of 10% in 2014 primarily because of institutional ownership CITATION Aza18 \l 1033 (Azar, 2018). Less competition in the airlines' industry has resulted in higher costs for the public and increased revenues for the airlines CITATION Sol16 \l 1033 (Solomon, Steven Davidoff, 2016). The increases in bank fees and interest rate reductions can also be ascribed to common or institutional ownership of banks. If there is less competition, the net result is higher fares for the consumers and increased profits for the owners of businesses. According to a study conducted by Jose Azar of the firm named Charles River Associates, the cross-ownership of shares in significant amounts by institutional shareholders has raised the fares by decreasing competition from 2001 to 2013. The study attributed 3 to 5 percent increase per annum to institutional investment in airlines industry CITATION Sol16 \l 1033 (Solomon, Steven Davidoff, 2016).

Some institutional investors, rules and investment culture is such that portfolios become dominated by public market investors. For instance, insurance companies and public pension funds are both subjected to state portfolio regulations. They, therefore, are required to have a certain amount of their investment securities publically traded. They may be compelled to limit their investment in illiquid (private) investments.

So far as the legality of such ownership is concerned, according to Section 7 of the Clayton Antitrust Act, they are illegal. The Act categorically makes liable such firms that may substantially lessen the competition or create monopolies. Moreover, the Supreme Court also prohibits purchases solely meant for investment. Since 2016, the Supreme Court has been taking interest in institutional investors to understand how big investors exploit businesses by buying ownership across a particular business. It has become clear after conducting many surveys to the judges that several increases in prices of consumer goods or serves are primarily because of institutional investment.

Laws are in place but unfortunately, these laws are not being enforced in letter and spirit. To do away with monopolies, the government should not only enforce Clayton Anti-trust but also support small stakeholders. There should be diversification across industries to restore and maintain competition. It will ultimately raise the living standards of the working class and provide a healthy environment for competition.

Currently, institutional investment is at its historical high. It is killing competition and cutting the wages of the middle classes. The costs for consumers are constantly increasing. Such problems have also intensified the politics of populism in America. To do away with the monopolies of the Gilded Age, the government of Theodore Roosevelt began a crackdown that ushered in the Progressive Era in the early 1900s. Today, it is high time that a legal campaign on similar lines is launched to deal with the all-time high institutional investment in today's America.

References

BIBLIOGRAPHY Azar, J. (2018). Anticompetitive Effects of Common Ownership. Journal of Finance, 2018.

Chen, J. (2019). What is an Institutional Investor? Retrieved from Investopedia: https://www.investopedia.com/terms/i/institutionalinvestor.asp

Posner, E., Morton, F. S., & Weyl, G. (2016). A Monopoly Donald Trump Can Pop. Retrieved from The New York Times: https://www.nytimes.com/2016/12/07/opinion/a-monopoly-donald-trump-can-pop.html

Solomon, Steven Davidoff. (2016). Rise of Institutional Investors Raises Questions of Collusion. Retrieved from The New York Times: https://www.nytimes.com/2016/04/13/business/dealbook/rise-of-institutional-investors-raisesquestions-of-collusion.html