Financial Cross-Ownership and Information Dissemination in a Supply Chain

Abstract

Problem definition: We examine the effect of financial cross-ownership—a situation in which a retailer holds stocks in a competitor—on two crucial operational decisions in a supply chain with competing retailers sourcing from a single supplier: information acquisition and production output. Academic/practical relevance: Financial interconnectedness between competing retailers raises fundamental questions regarding the way information is managed in such markets and the way it affects consumer welfare. Thus, in addition to the relevance to operations management scholars, this subject is of potential interest to policy makers and regulators. Although financial cross-ownership has mainly been unchallenged by regulators, the European Commission has recently called for a deeper understanding of the competitive aspects of this investment tool. Methodology: We develop a game-theoretic model, in which we analyze a supply chain comprised of an incumbent retailer holding stocks in an entrant and both retailers source from a mutual supplier. The incumbent can obtain costless demand information, and the supplier decides whether to leak this information if it is available to him or her. Results: We demonstrate that holding stocks in a rival better aligns the incentives of the rival retailers and results in a lower competition level during the production stage. However, financial cross-ownership can also result in an increased incentive for information acquisition, even when the information is later leaked to the entrant. The acquisition of information benefits not only the retailers but can also make the consumers better off. Managerial implications: Our work contributes to the heated policy debate regarding the competitive effects of financial cross-ownership. In addition, we are the first, to the best of our knowledge, to study the way financial cross-ownership affects operational decisions. Specifically, we show that financial cross-ownership provides incentives to acquire demand information even under the threat of information leakage.