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An index owning both Coke and Pepsi wants the soft-drink market to grow bigger -- it is presumably indifferent to whether Coke slays Pepsi, Pepsi slays Coke, or

An index owning both Coke and Pepsi wants the soft-drink market to grow bigger -- it is presumably indifferent to whether Coke slays Pepsi, Pepsi slays Coke, or both grow bigger together, as long as the total market increases. Which is arguably a good thing. Let's say that Coke has 60% of the market and Pepsi has 40% of the market. If Coke's investors are separate from Pepsi's investors, then it would be in their interests to take a tactic that kills Pepsi and allocates half of its market share to Coke and the other half goes up in smoke to a smaller overall market -- now Coke is half again as big as it was! But the industry is smaller. That said, I'm not sure that realistically, market-decreasing tactics really exist in most cases -- I can't think of a real world example. The collusion argument is certainly interesting.

makomk 11y ago
More precisely, an index fund owning both Coke and Pepsi wants profits from the soft-drink market to grow bigger, and the easiest way for that to happen is for both companies to increase their prices at the same time. Note that this is exactly the opposite of how competition in capitalism is meant to work - it's meant to drive down prices towards the cost of production, increasing overall efficiency as it does. Note also that this likely also results in selling less soft drinks than if the companies were actually competing, because increasing prices generally decreases sales.
- fweespeech 11y ago
  I'm not sure that is an actual problem. Generally, executives get compensated in stock in some way in their company. So the Coke C-Suite is motivated to compete with the Pepsi C-Suite even if the board members are the same for both companies.
  - eitally 11y ago
    I think it is a problem. Unless you've worked in one of these industries where there are a handful of major players and rough parity of capability between them (like consumables, electronics manufacturing, heavy industry, oil & gas), corporations trade execs on a regular basis, and when those execs jump ship for a competitor they often lure away a good number of their key staff, too. So not only do you end up with a bigger overall market if they all do well, you end up with leadership (both executive staff and board members) who knows the ins & outs of everyone. It is in everyone's best interest for everyone to succeed, but if a company falters significantly it becomes either an acquisition target or it slowly fades away as key talent migrate to competitors. Not only this, but if you attend the earnings calls for corporations in the same sector (or even better, if you're lucky enough to attend one of their investor & analyst days), you'll see firsthand how the analysts are wined & dined, and how closely everyone knows everybody else. It's a big game that creates a ton of wealth at the top -- as long as the status quo is roughly maintained and change is incremental.
    - ethbro 11y ago
      I understand what you meant, but wealth being created at the top is a bit charitable. Let's call it like it is: it's reallocated from consumers (vs. a more competitive market) and from shareholders (vs. a more competitive management landscape). Regulatory capture should have a management capture analog. ;)
      - eitally 11y ago
        Yes, you are of course correct. :)
- ucaetano 11y ago
  Coke and Pepsi don't compete only with themselves, they compete for a "share of stomach" with a huge number of other drinks and foods. Rising prices for soft drinks can drive people to those other drinks, eventually eroding profits.
  - ethbro 11y ago
    I am intrigued by your more broadly diversified stomach-based ETF and wish to subscribe to your newsletter. (Or, in other words, hypothetically as a high-level investors, you'd want indices that track needs, not particular fulfillment thereof.)
    - ucaetano 11y ago
      I don't have any, but there are plenty of needs-focused ETFs in the market, just pick and choose. For example: http://money.usnews.com/funds/etfs/consumer-goods-funds/vanguard-consumer-staples-index-fund/vdc http://money.usnews.com/funds/etfs/consumer-goods-funds/vang... That's the beauty of ETFs, there is a massive number to pick and choose from, representing so many different sectors of the economy.
  - avn2109 11y ago
    However those "other drinks and foods" are also owned by Kraft, Altria, Nestle, and FritoLay, which are in turned owned by the same index investors, so we've just pushed our antitrust argument up one level of metaness. Yes, I know some of these have probably bought others of these, I'm not up on food industry M&A
    - ucaetano 11y ago
      It's way more complex than that. Coke and Pepsi compete with tap water, owned by the local utility, as well as fruits and even the local snack stand, since sometimes people have enough money to buy a coke OR a snack, but not both. In other words, it is far too complex. In Brazil, for example, a major competitor of Pepsi and Coke on the at-home segment if fruit sellers on traffic lights. People can buy a bag of oranges for a buck or so, and make a lot of healthy juice out of it, instead of spending 5X for a sugary drink. And if there's opportunity to invest in companies which are undervalued due to being out of indexes, believe me, there will be plenty of people doing it.
blueside 11y ago
Why can't the index fund just sell Pepsi and keep Coke? Just because one of the companies does bad means you have to divest from the entire industry?
- theseatoms 11y ago
  Index funds are typically meant to track the broad market, of which both Coke and Pepsi are parts.
- hsitz 11y ago
  Because both companies are on the index that the index fund matches, and the whole premise behind index funds is that they're set up to require their managers to purchase stock of all companies in the index (managers not allowed to pick and choose).
- saryant 11y ago
  Because then it's not an index fund, it's an actively managed fund. The appeal of an index fund is that it mechanically tracks an index so costs are very very low and investors can track the market as closely as possible.
- im3w1l 11y ago
  The idea of an index fund is that you neither buy nor sell. Just by sitting on your stock, you get average returns. There are a few exceptions: when someone invests in the fund, the fund has to invest their money, and vice versa when someone withdraws money from the fund. When a company enters/leaves the index the fund is tracking, the fund has to buy/sell their shares.
return0 11y ago
It wants its profits to grow bigger though, regardless of consumer benefit, which is a lot like creating a cartel.
ci5er 11y ago
> That said, I'm not sure that realistically, market-decreasing tactics really exist in most cases -- I can't think of a real world example. What do you mean? Of the Coke/Pepsi type market? Giants whacking away at each other? If you are looking more broadly - the 'market decreasing tactics' is one aspect of what the innovator's dilemma is about. One of my favorite VC types, likes to invest in companies that fill the following thesis: "AcmeCo is a new entrant, with some cool tools, into an aging $50B (or whatever) / year industry. When AcmeCo is done lighting a neutron bomb in the industry and the dust settles, it is now a $5B industry, and AcmeCo is the last man standing with 60%+ market share." > The collusion argument is certainly interesting. That it is. I had not come across some of the structure of the argumentation in this article before.

makomk 11y ago

More precisely, an index fund owning both Coke and Pepsi wants profits from the soft-drink market to grow bigger, and the easiest way for that to happen is for both companies to increase their prices at the same time. Note that this is exactly the opposite of how competition in capitalism is meant to work - it's meant to drive down prices towards the cost of production, increasing overall efficiency as it does. Note also that this likely also results in selling less soft drinks than if the companies were actually competing, because increasing prices generally decreases sales.

fweespeech 11y ago
I'm not sure that is an actual problem. Generally, executives get compensated in stock in some way in their company. So the Coke C-Suite is motivated to compete with the Pepsi C-Suite even if the board members are the same for both companies.
- eitally 11y ago
  I think it is a problem. Unless you've worked in one of these industries where there are a handful of major players and rough parity of capability between them (like consumables, electronics manufacturing, heavy industry, oil & gas), corporations trade execs on a regular basis, and when those execs jump ship for a competitor they often lure away a good number of their key staff, too. So not only do you end up with a bigger overall market if they all do well, you end up with leadership (both executive staff and board members) who knows the ins & outs of everyone. It is in everyone's best interest for everyone to succeed, but if a company falters significantly it becomes either an acquisition target or it slowly fades away as key talent migrate to competitors. Not only this, but if you attend the earnings calls for corporations in the same sector (or even better, if you're lucky enough to attend one of their investor & analyst days), you'll see firsthand how the analysts are wined & dined, and how closely everyone knows everybody else. It's a big game that creates a ton of wealth at the top -- as long as the status quo is roughly maintained and change is incremental.
  - ethbro 11y ago
    I understand what you meant, but wealth being created at the top is a bit charitable. Let's call it like it is: it's reallocated from consumers (vs. a more competitive market) and from shareholders (vs. a more competitive management landscape). Regulatory capture should have a management capture analog. ;)
    - eitally 11y ago
      Yes, you are of course correct. :)
ucaetano 11y ago
Coke and Pepsi don't compete only with themselves, they compete for a "share of stomach" with a huge number of other drinks and foods. Rising prices for soft drinks can drive people to those other drinks, eventually eroding profits.
- ethbro 11y ago
  I am intrigued by your more broadly diversified stomach-based ETF and wish to subscribe to your newsletter. (Or, in other words, hypothetically as a high-level investors, you'd want indices that track needs, not particular fulfillment thereof.)
  - ucaetano 11y ago
    I don't have any, but there are plenty of needs-focused ETFs in the market, just pick and choose. For example: http://money.usnews.com/funds/etfs/consumer-goods-funds/vanguard-consumer-staples-index-fund/vdc http://money.usnews.com/funds/etfs/consumer-goods-funds/vang... That's the beauty of ETFs, there is a massive number to pick and choose from, representing so many different sectors of the economy.
- avn2109 11y ago
  However those "other drinks and foods" are also owned by Kraft, Altria, Nestle, and FritoLay, which are in turned owned by the same index investors, so we've just pushed our antitrust argument up one level of metaness. Yes, I know some of these have probably bought others of these, I'm not up on food industry M&A
  - ucaetano 11y ago
    It's way more complex than that. Coke and Pepsi compete with tap water, owned by the local utility, as well as fruits and even the local snack stand, since sometimes people have enough money to buy a coke OR a snack, but not both. In other words, it is far too complex. In Brazil, for example, a major competitor of Pepsi and Coke on the at-home segment if fruit sellers on traffic lights. People can buy a bag of oranges for a buck or so, and make a lot of healthy juice out of it, instead of spending 5X for a sugary drink. And if there's opportunity to invest in companies which are undervalued due to being out of indexes, believe me, there will be plenty of people doing it.

blueside 11y ago

Why can't the index fund just sell Pepsi and keep Coke? Just because one of the companies does bad means you have to divest from the entire industry?

theseatoms 11y ago
Index funds are typically meant to track the broad market, of which both Coke and Pepsi are parts.
hsitz 11y ago
Because both companies are on the index that the index fund matches, and the whole premise behind index funds is that they're set up to require their managers to purchase stock of all companies in the index (managers not allowed to pick and choose).
saryant 11y ago
Because then it's not an index fund, it's an actively managed fund. The appeal of an index fund is that it mechanically tracks an index so costs are very very low and investors can track the market as closely as possible.
im3w1l 11y ago
The idea of an index fund is that you neither buy nor sell. Just by sitting on your stock, you get average returns. There are a few exceptions: when someone invests in the fund, the fund has to invest their money, and vice versa when someone withdraws money from the fund. When a company enters/leaves the index the fund is tracking, the fund has to buy/sell their shares.

return0 11y ago

It wants its profits to grow bigger though, regardless of consumer benefit, which is a lot like creating a cartel.

ci5er 11y ago

> That said, I'm not sure that realistically, market-decreasing tactics really exist in most cases -- I can't think of a real world example. What do you mean? Of the Coke/Pepsi type market? Giants whacking away at each other? If you are looking more broadly - the 'market decreasing tactics' is one aspect of what the innovator's dilemma is about. One of my favorite VC types, likes to invest in companies that fill the following thesis: "AcmeCo is a new entrant, with some cool tools, into an aging $50B (or whatever) / year industry. When AcmeCo is done lighting a neutron bomb in the industry and the dust settles, it is now a $5B industry, and AcmeCo is the last man standing with 60%+ market share." > The collusion argument is certainly interesting. That it is. I had not come across some of the structure of the argumentation in this article before.