Well, consumers shouldn't be much worse off, otherwise it creates an arbitrage opportunity. Although Pepsi and Coke may be indexed, they aren't the same entity

Well, consumers shouldn't be much worse off, otherwise it creates an arbitrage opportunity. Although Pepsi and Coke may be indexed, they aren't the same entity allowing investors to just own one. If there's some action that Pepsi could take that would massively reallocate the pie in it's favor (by winning over consumer for instance), then investors ought to start massing to it and becoming more activist. This would come at the expense of the index of course. So really as long as there's easy 'severability' of the companies in the index, they shouldn't be overtly monopolistic. But I agree in industries with high capital requirements (energy, biotech, etc.) it may be impossible to separate out the companies and then they would be de facto merged. This really is an interesting idea because a solution seems hard to find. Outright banning indexing would be nearly impossible to enforce (large pension funds could reproduce the index at a slighter higher cost).