In an economy where everyone holds the market portfolio, all the companies have the same shareholders. If, in addition, firms act in the interest of their shareholders (i.e., if the agency problem is solved), the equilibrium outcome is equivalent to an economy-wide monopoly.
This is one of those theorems, like the Modigliani-Miller theorem, that tells you more about what has to be false than about what is actually true.
When I was at Freddie Mac in the 1990s, some of the economists there asked, “Why do our shareholders want us and Fannie Mae to compete?” Here you had a situation where we were a duopoly, with a lot of room to charge higher fees without mortgage lenders finding another outlet for their business, and many of our investors also owned shares in Fannie. Yet if a Countrywide Funding or a Prudential Home Mortgage wanted to play Freddie and Fannie off against one another, they could do it. We would cut fees to the bone and lower the standards on the mortgages that we would buy.
Actually, there was one instance where we colluded. Around 1990, there was an outbreak of “low-doc” lending, and Freddie’s CEO went to Fannie and obtained an agreement that neither firm would buy low-doc loans. Of course, low-doc loans made a big comeback during the housing boom, and this time around under different management Freddie and Fannie went all in on “no income, no job, no assets,” meaning that what those lines stated on the loan application went unverified by supporting documentation.
In fact, if there is going to be collusion, the initiative is not going to come from shareholders. Shareholders are represented by the Board of Directors, but you don’t see two companies in the same industry with Board members in common. And if you did, it wouldn’t take a particularly aggressive anti-trust regulator to make an issue out of it.
I feel like you’re just pushing back the question to some different level. What if 90% of the shareholder base of a company comes from large indexers, like Vanguard. This would mean that Vanguard et al. would have a significant influence in who is elected to the Board of Directors. They don’t necessarily need to be the same people across different companies so long as they know that they need to keep Vanguard et al. happy to retain their positions.
But why does Vanguard care whether the share price goes up or down? Vanguard’s job is to track the index, not earn excess returns. The investors care, but what is an investor going to do, call up Vanguard and complain that they need to do more about price competition between the airlines? Stop indexing?
Also, as a legalistic matter it may be the directors who are in charge of the corporation, but really it’s management that sets prices and decides competitive strategy. And management cares about management’s compensation, not the portfolio of the shareholder. And management’s compensation is tied to the share price and other profitability metrics of the company. Often their comp targets are even benchmarked against their industry, so they have an active incentive to harm the competition.
Fannie and Freddie did not go “all in” on Ninja loans. They did buy some late in the game when their market share had declined.
This is one of those theorems, like the Modigliani-Miller theorem, that tells you more about what has to be false than about what is actually true.
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I always remember my last trip to the county clerk, rediscovering the amazing inefficiency of government. To be a good economist, you have to be near deadly poor, then the obvious emerges, the theories simpler.