A New Look at Oligopoly: Implicit Collusion Through Portfolio Diversification

Abstract

My dissertation is a theoretical and empirical study of the effects of portfolio diversification on oligopolistic industries. The first chapter serves as the introduction, and explains how the prominent role of institutional investors in US stock markets, who tend to own more diversified portfolios than individual households, has increased the relevance of portfolio diversification for the analysis of market structure.

In the second chapter I develop a model of oligopoly with shareholder voting. Instead of assuming that firms maximize profits, the objective of the firms is decided by majority voting. This implies that portfolio diversification generates tacit collusion. In the limit, when all shareholders are completely diversified, the firms act as if they were owned by a single monopolist.

The third chapter introduces the model in a general equilibrium context. In a model of general equilibrium oligopoly with shareholder voting, higher levels of wealth inequality and/or foreign ownership lead to higher markups and less efficiency.

In the fourth chapter, I study the evolution of shareholder networks for all publicly traded firms in the United States between 2000 and 2011. The most important conclusion of the analysis is that the density of the network has more than doubled over the period, and this is robust to the threshold level chosen.

In the fifth chapter, I study the empirical relationship between common ownership and interlocking directorships. Firm pairs with higher levels of common ownership are more likely to share directors, and their distance in the network of directors is smaller on average. The evidence presented in this chapter suggests that institutional investors play an active role in corporate governance. In particular, it supports the hypothesis that institutional shareholders have influence on the board of directors.

In the sixth chapter, I study empirically the relationship between networks of common ownership and market power. Industries with higher levels of common ownership have higher markups on average.

The last chapter concludes with a discussion of policy implications and potential directions for further research. Based on the theory, I propose a new Herfindahl index adjusted for portfolio diversification.