Partial Cross Ownership Research Articles

Horizontal Partial Cross Ownership and Innovation*

We study the effects of partial cross ownership (PCO) among rival firms on their incentives to innovate. PCO in our model gives rise to a price effect due to its effect on price competition and hence on the marginal benefit from investment, as well as a cannibalization effect which arises because each firm internalizes part of the negative externality of its investment on the rival's profit. We show that overall, PCO may benefit or harm consumers depending on the size of the PCO stakes, their degree of symmetry, the size of the innovation, its marginal cost, and whether it is drastic or not.

Partial cross ownership, exclusive contracting, and market entry

We demonstrate that the anticompetitive effect of exclusive contracting on market entry can be completely nullified if the entrant is allowed to sell partial cross ownership to the incumbent, and compare this mechanism to others in the literature.

An Experiment on Partial Cross-Ownership in Oligopolistic Markets

An Experiment on Partial Cross-Ownership in Oligopolistic Markets

Input price discrimination under passive partial cross ownership

ABSTRACT Hu, Mizuno, and Song (Applied Economics Letters, 2021) compare the welfare effects of input price discrimination (IPD) and uniform input pricing (UIP) under passive partial ownership (PPO) where one downstream firm holds equity shares of its rival. This paper extends their setup to accommodate passive partial cross ownership (PCO) where each downstream firm holds equity shares of its rival. A common conclusion is that IPD improves welfare if the cost asymmetry is sufficiently low. Interestingly, this finding holds regardless of whether the more efficient firm is also the dominant partial shareholder. Indeed, it is found that the likelihood that IPD is welfare enhancing increases as firms become more asymmetric in terms of equity shares. However, the critical level of cost asymmetry differs under PPO and PCO, meaning that there are cases where IPD performs better in terms of social welfare under PCO but not under PPO, and vice versa. The main conclusion of this paper is that, compared to the PPO structure, PCO reduces the likelihood that IPD results in better welfare outcomes than UIP.

Strategic demand information sharing under partial cross ownership

We consider a two-echelon supply chain with partial cross ownership (PCO) comprising a supplier and a retailer. The retailer is endowed with superior information about uncertain market potential. The supplier must produce the product before the market potential is realized. We explore the retailer’s strategy to share his private demand information with the supplier via cheap talk. We demonstrate that when the proportion of partial cross holding shares is moderate, the retailer can disclose private demand information truthfully. Without PCO, this informative equilibrium cannot be achieved regardless of the acquired signal. With PCO, the retailer wants to obtain a sufficient production quantity if the realized demand is high and fears the cost of unsold products if the realized demand is low. These two countervailing incentives can cause the retailer to share his information truthfully. We find that this truthful information sharing benefits both the retailer and the supplier. In addition, we discuss the case of endogenous wholesale price and indicate the conditions in which truthful information sharing can be achieved. Moreover, we find that when the market potential follows a general continuous distribution, the perfect informative equilibrium does not exist.

Anti-competitive effects of partial cross-ownership: Experimental evidence

In theory, partial cross-ownership affects product prices and consumer welfare negatively, but empirical evidence is highly controversial. For competition policy it is important whether such effects are substantial enough to cause action. We report a lab experiment on a Cournot duopoly with symmetric passive cross-ownership in which we increase the degree of cross-ownership from 10% (treatment LOW) to 40% (treatment HIGH). We find an increase in price that is substantial enough to be considered problematic from an anti-trust perspective. In addition we show that part of the price increase is caused by increasing collusion.

An experiment on partial cross-ownership in oligopolistic markets

We examine coordinated and unilateral effects of horizontal partial cross-ownership (PCO) in a laboratory experiment. We consider homogeneous Bertrand markets where firms have symmetric, non-controlling shares of each other, and conduct the experiment with both stranger and partner matching. The partner data (repeated game) confirm the prediction that firms are more (tacitly) collusive with PCO than without. In the stranger data (one-shot game), average prices are increasing with higher degrees of PCO. This is inconsistent with rather extreme Nash predictions for this setup. We show that in a Quantal Response Equilibrium firms’ incentives to compete are reduced with passive PCO. QRE predictions explain the data from the stranger treatment well.

Anti-Competitive Effects of Partial Cross-Ownership: Experimental Evidence

In theory, partial cross-ownership affects product prices and consumer welfare negatively, but empirical evidence is highly controversial. For competition policy it is important whether such effects are substantial enough to cause action. We report a lab experiment on a homogeneous duopoly market with symmetric passive crossownership in which the degree of cross-ownership varies between treatments (LOW vs HIGH). We argue that the observed negative effects are substantial enough to be considered problematic in real markets.

Tacit Collusion of Partial Cross Ownership Under Cournot Model

Partial cross ownership (PCO) among firms affects their incentives to engage in tacit collusion. We analyze collusion behavior in an n-firm industry which allows asymmetric cross ownership, under Cournot competition. We find that in some ways increasing PCO hinders tacit collusion under the traditional uniform output distribution scheme. However, this scheme is not always feasible for collusion. For a greater variety of situations, we examine different subgame perfect equilibriums and conclude that, tacit collusion can be facilitated when PCO increases.

Effect of partial cross ownership on supply chain performance

Partial cross ownership (PCO) in a dyad supply chain refers to a situation where each firm holds a portion of its partner’s shares. We study this topic in push and pull supply chains, and prove that neither the supply chain’s nor any member’s profit changes with the percentage of the leader’s shares the follower holds. However, while the profits of the chain and the leader increase with the percentage of the follower’s shares held by the leader, the follower’s profit does not necessarily increase or decrease. As a result, both partners can always achieve a win–win by setting a proper price for transferring the follower’s shares to the leader. Moreover, the equilibrium wholesale price may be greater than the retail price in the push chain, but less than the marginal production cost in the pull chain, contradicting the usual results found in the literature. We also derive a necessary and sufficient condition on the structure of PCO allowing a pull chain to perform better than a push one. This extends Cachon (2004)’s result that a pull chain always performs better than a push one (without PCO). Finally, PCO can coordinate a chain if and only if each one holds half of the other’s shares.

Partial Cross-Ownership, Cost Asymmetries, and Welfare

The present study analyses the effects on social welfare of the existence of cross-participation at ownership level in a Cournot duopoly. We show that cross-participation, although it lowers the degree of competition by reducing total output and consumer surplus, may increase social welfare, provided that (i) the firm owned by a single shareholder is less efficient than the other (cross-participated) firm and (ii) the size of the market is not too large. Therefore, the policy implication is that larger cross-participations at ownership level should be favoured, despite their anticompetitive nature, when the cross-participated firm is relatively more efficient and the extent of the market is not too large.

Do Partial Cross Ownership and Budget Constraints Matter for Privatization Policy?

We show that in the presence of cross-ownership associated with an improvement of production inefficiency of the public firm, the optimal privatization policy is full privatization whether budget constraints are imposed on the public firm. For reaching a higher level of social welfare, the government does not need to impose budget constraints on the public firm when the fixed cost is low.

Bargaining in a Push Supply Chain System under Partial Cross Ownership

Supply chain under partial cross ownership (PCO) refers to the dyad in which each one holds part of its partners shares. In a two-echelon push supply chain under the partial cross ownership, when the operational decisions are bargained, the supply chain is coordinated, and the allocation of the chain profit is dependent on the bargain coefficients and the reserve profits, and independent of the PCO structure: letting the retailer hold part of the suppliers shares doesnt affect the chain efficiency and both players profits. Similarly, letting the supplier hold part of the retailers shares doesnt affect the chain efficiency and both players profits.

The Anticompetitive Effects of Minority Stake Acquisitions

We show that partial cross ownerships between rival firms are driven by competitive considerations and have significant anti-competitive effects. Firms in more competitive industries are more likely to acquire a minority stake in a rival firm’s equity. Moreover, significant increases in partial cross ownership within an industry result in higher output prices and higher price-cost margins. The increase in prices and profits is larger in ex-ante more competitive industries, suggesting that rivals may acquire minority stakes in each other with the express purpose of reducing competition. Consistent with theory, the price increase is greater when firms participating in the partial cross ownership are larger or have a bigger sales market share. Our results suggest that passive investments in rival firms deserve some antitrust scrutiny.

Partial cross-ownership and strategic environmental policy

This paper analyzes the effect of passive investment in rival firms on the setting of cooperative and non-cooperative environmental taxes. We consider two firms located in different countries, with each firm owning the same percentage of the stock of its rival. We show that bilateral partial cross-ownership affects the taxes set by the countries in the cooperative and non-cooperative cases. When the stake that one firm has in its rival is great enough and environmental spillovers are low enough, cooperative taxes are lower than non-cooperative taxes. For the remaining values of parameters the opposite result is obtained.

Cross-shareholding in the Japanese Banking Sector, Tacit Collusion, and Market Power

This paper modifies the well-known conjectural variation model of Clarke and Davis (1982) by taking into account partial cross ownership (PCO) links among firms. It is shown that, unlike in the no PCO case, the link between firms’ price-cost margins and the degree of tacit collusion is nonlinear in the presence of PCO. Thus, ignoring PCO in their presence would most likely lead to biased results due to model misspecification. The model is applied to the Japanese banking sector in 2003. We find that Japanese banks compete in a modest collusive environment, while neglecting PCO gives a different result indicating a Cournot oligopoly. It is further shown that banks with passive holdings in rivals exert a strictly larger market power than those without any PCO. In particular, city banks with many shareholdings are found to exercise a much larger market power than regional banks with none or few stockholdings.

Partial cross ownership and tacit collusion

We examine the effects that passive investments in rival firms have on the incentives of firms to engage in tacit collusion. In general, these incentives depend in a complex way on the entire partial cross ownership (PCO) structure in the industry. We establish necessary and sufficient conditions for PCO arrangements to facilitate tacit collusion and also examine how tacit collusion is affected when firms' controllers make direct passive investments in rival firms.

Partial Cross Ownership and Tacit Collusion

This paper shows how competing firms can facilitate tacit collusion by making passive investments in rivals. In general, the incentives of firms to collude depend in a complex way on the whole set of partial cross ownership (PCO) in the industry. We establish necessary and sufficient conditions for PCO arrangements to facilitate tacit collusion and also examine how tacit collusion is affected when firms' controllers make direct passive investments in rival firms.