Abstract

This paper investigates how overlapping ownership affects quality levels, consumer surplus, firms’ profits and welfare when the industry is a vertically differentiated duopoly and quality choice is endogenous. This issue is particularly relevant since recent empirical evidence suggests that overlapping ownership constitutes an important feature of a multitude of vertically differentiated industries. We show that overlapping ownership, while detrimental for welfare, may increase or decrease the quality gap, consumer surplus and firms’ profits. In particular, when the overlapping ownership structure is such that the high quality firm places a positive weight on the low quality firm’s profits, the incentives of the high quality firm to compete aggressively reduce. This may increase the equilibrium quality of the low quality firm, which in turn may lead to higher consumer surplus, despite higher prices.

Highlights

  • Overlapping ownership - in the form of cross-ownership by competitors or common ownership by shareholders - can induce managers to internalize the externalities they impose on rival ...rms (Rubinstein and Yaari, 1983; Rotemberg, 1984; Gordon, 1990; Hansen and Lott, 1996)

  • For example, Schmalz (2018), Newham, Seldeslachts and Banal-Estanol (2018) and Backus, Conlon and Sinkinson (2019) for evidence on the airline, banking, supermarket and pharmaceutical industries.2;3 We show that when the overlapping ownership structure is such that the high quality ...rm places a positive weight on the low quality ...rm’s pro...ts, the incentives of the high quality ...rm to compete aggressively reduce

  • We have analyzed the implications of overlapping ownership in a standard vertical di¤erentiation duopoly model

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Summary

Introduction

Overlapping ownership - in the form of cross-ownership by competitors (internal shareholders) or common ownership by (external) shareholders - can induce managers to internalize the externalities they impose on rival ...rms (Rubinstein and Yaari, 1983; Rotemberg, 1984; Gordon, 1990; Hansen and Lott, 1996) This internalization can naturally lessen product market competition since it reduces the incentive of ...rms with ownership links to compete aggressively, leading (i) to higher product prices and lower output levels (Bresnahan and Salop, 1986; Reynolds and Snapp, 1986; Flath, 1992; Dietzenbacher, Smid and Volkerink, 2000; Shelegia and Spiegel, 2012; Brito, Ribeiro and Vasconcelos, 2019a); and (ii) to a lower likelihood of entry (Newham, Seldeslachts and BanalEstanol, 2018).

Theoretical Model
Consumers Decision Problem
The condition for an uncovered market is
Conclusions

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