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Michael Sinkinson is a Count Chocula guy. Sure, it’s not the healthiest breakfast. But he finds what General Mills describes as “the chocolatey cereal with spooky-fun marshmallows” just delightful. Sinkinson is an (adult) economist at the Yale School of Management, and he says he’s been known to indulge himself in Count Chocula and other “Monster cereals” when they come out around Halloween. But lurking behind the Count Chocula box he’s been eating is a shadowy specter. It’s a potential problem for our economy known as “the common ownership hypothesis.”
Over the last couple decades, investors have poured trillions and trillions of dollars into index funds and other massive funds run by three companies: Vanguard, BlackRock, and State Street Global Advisors, which together have over $16 trillion in assets under their control. If you have a retirement account, there’s a good chance it’s run by one of them. Their combined average stake in each of the biggest 500 American corporations (aka the S&P 500) went from 5.2% in 1998 to 20.5% in 2017. As we’ve written before in the Planet Money newsletter, legal scholars and economists are increasingly concerned as these gigantic institutional investors gobble up greater and greater stakes in companies within the same industry.
They fear Corporate America, under common ownership, is morphing into a stealth monopoly, where institutional investors call the shots, competition disappears, and consumers are stuck paying higher prices. Over the last several years, some studies have suggested that it may already be a problem. One group of economists found some evidence suggesting that common ownership in the airline industry is already resulting in higher prices for consumers.
Sinkinson and his colleagues, Christopher Conlon and Matthew Backus, were skeptical of this study and wanted to research the issue themselves. They began searching for a good industry to test whether common ownership of competing companies affects prices. They decided that the breakfast cereal industry was a great place to study the common ownership hypothesis. For one, Vanguard, BlackRock, and State Street Global each own around 5 percent of each of the big four cereal companies: General Mills, Post, Quaker Oats, and Kellogg’s.
In what economists call a natural experiment, the researchers found a kind of control group, Kellogg’s. While the other cereal makers’ biggest shareholders are Vanguard, BlackRock, and State Street, Kellogg’s biggest shareholder is far and away the W. K. Kellogg Foundation Trust, which owns almost a quarter of the entire company. It doesn’t own a share in the other cereal brands, so it should only really care about Kellogg’s profits. So Kellogg’s cereal prices serve as a kind of counterfactual to test if the other big cereal companies are behaving differently. The economists used this and other statistical Trix (I’m sorry) to see if there’s any evidence that General Mills, Post, and Quaker Oats are responding to the desires of common owners and setting prices as if they were colluding like a cartel, scheming to profiteer on your breakfast.
“We do not find any evidence of any price effects of common ownership in the market for cereal,” says Christopher Conlon, another co-author of the study. Conlon, by the way, says he doesn’t eat cereal. He’s a toast guy.
Big Cereal may not be jacking up prices on Lucky Charms and Fruity Pebbles because institutional investors are whispering in executives’ ears. But it’s still not a paragon of perfect competition. Big Cereal is a highly concentrated oligopoly in which the big four companies own roughly 85 percent of the market. In the seventies, US regulators grew concerned about this, worrying that cereal industry business practices were not so “Gr-r-reat!” for consumers (sorry, Tony). But the case ended up getting dismissed.
Today, according to the estimates of Sinkinson, Conlon, and Backus, the big cereal companies continue to have healthy profit margins. But the researchers say the reason for this is largely because consumers are willing to pay a higher price for branded cereals, which are backed by advertising, market research, and better distribution.
Next time you get up, Conlon (the toast-eater) says, you can enjoy a well-balanced breakfast knowing that “your cereal is likely not more expensive because your 401(k) invested in it, at least not yet.”
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