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Horizontal Shareholding Interlocks
Abstract
Horizontal shareholding interlocks induce Cournot industries to restrict production. The cartelizing effects of horizontal shareholding interlocks are greater if firms are mindful of indirect shareholding links than if only attentive to direct links. Indirect shareholding exists when a firm A holds stock in B and B holds stock in C. Several algebraic examples of Cournot industries with shareholding interlocks are explored.
... As found by Reynolds and Snapp (1986), under Cournot competition, the equilibrium will become less competitive, with less aggregate output and higher price. Since then a growing literature has followed up on the work of Reynolds and Snapp (1986) to support the theory of harm, including Flath (1992) and shows that the results of harms are robust with respect to product differentiation. 1 There have also been studies on the collusive effects of cross-holdings in repeated settings. ...
... Most countries currently do not allow antitrust authorities to scrutinize cross-holdings. 10 As a result, a profitable merger would be blocked because of merger regulations but a non-controlling minority shareholding would go through. 11 Importantly and surprisingly, our analysis of cross-holding generates the same result as the well-known results under merger in Huck et al. (2001). ...
... This is also the main argument why merger control rules are not allowed to be extended to cover cross-holdings in most countries. Secondly, the merged firm can allocate production across several plants which may provide a variable cost advantage over single-plant firm.10 So far, there are only several countries, such as United States, Japan, Germany and the United Kingdom, in which anti-trust authorities are competent to review acquisitions of partial non-controlling shareholdings. ...
We show that bilateral cross-holding can be profitable for firms with symmetric technologies in a Stackelberg oligopoly. Furthermore, if firms involved in cross-holding obtain a strategic advantage to be the leaders (i.e. Stackelberg leadership through cross-holding), such cross-holding will improve both consumer surplus and social welfare. We also discuss robustness of our main results with respect to convex costs and product differentiation.
... Theoretical literature such as Reynolds and Snapp (1986), Flath (1991), Flath (1992), Malueg (1992), and Gilo et al. (2006) has studied the effects of NCMS on firms' profits and the sustainability of collusion under a variety of assumptions with respect to a number of key parameters such as firms' profit function, their strategic variables (prices versus quantity), and the degree of product differentiation. This diversity of assumptions constitutes an impediment to the comparability of different articles' results. ...
... In addition, Flath (1991Flath ( , 1992) presented a static model to study the effects of NCMS on firms' profits not only in Cournot competition with homogeneous products, but also in Bertrand competition with either differentiated or homogeneous products. 2 Unfortunately, these results cannot be compared to those of Reynolds and Snapp (1986) or Malueg (1992). ...
... Firms' best responses are initially obtained under the assumption of equation (1). Firm i is assumed to maximize its majority owner's payoff ̃i : Firm i's product market profit i , minus the dividend j i that is paid to firm j, plus the dividend i j that is received from firm j (Reynolds and Snapp 1986;Malueg 1992): Flath (1991Flath ( , 1992, Gilo et al. (2006), and Shelegia and Spiegel (2012) modeled cross ownership and used a different profit function where the firms maximize their accounting profits: ̂i = i + îj . In Sect. ...
This article merges theoretical literature on non-controlling minority shareholdings (NCMS) in a coherent model to study the effects of NCMS on competition and collusion. The model encompasses both the case of a common owner holding shares of rival firms as well as the case of cross ownership among rivals. We find that by softening competition, NCMS weaken the sustainability of collusion under a greater variety of situations than was indicated by earlier literature. Such effects exist, in particular, in the presence of an effective competition authority.
... They consider, instead, limiting corporate control arrangements that involve either full influence or no influence at all in the firm's decisions. 3 The second direction is taken by Flath (1992) , who maintains Reynolds and Snapp (1986) 's focus on financial rights but introduce the distinction between direct and indirect rights. He models the latter by noting that if (i) the aggregated profit of a firm is a function of the operating profit of the firm and the aggregated profit of the rival firms (in which it holds financial rights), and (ii) the same is true for all firms in the industry, then we can write a system of aggregate profit equations that implicitly determines the aggregate profit of each firm as a function of the operating profit of all the firms in the industry over which the firm holds financial rights, either direct or indirectly. ...
... The theoretical framework typically employed in the literature to model both crossand common-ownership is rooted in Brito et al. (2014b) . They combine a cross-ownership model in the lines of Reynolds and Snapp (1986) and Flath (1992) with a commonownership model in the lines of O'Brien and Salop (2000) . The resulting theoretical framework can cope with acquisition settings involving internal and external owners as well as financial and corporate control rights that can be direct and indirect , partial or full . ...
... Dietzenbacher et al. (2000) , on the other hand, maintain Reynolds and Snapp (1986) 's focus on financial rights and extend their proposal to indirect rights. They build on the theoretical framework of Flath (1992) to develop a modified HHI to screen the unilateral effects of acquisitions that induce a cross-ownership of direct and indirect financial rights . ...
Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose a generalization of the two most traditional indicators used to screen unilateral anti-competitive effects - the Herfindahl-Hirschman Index and the Gross Upward Price Pressure Index - to partial horizontal acquisition settings. The proposed generalized indicators are endogenously derived under a probabilistic voting model in which the manager of each firm is elected in a shareholder assembly between two potential candidates who seek to obtain utility from an exogenous rent associated with corporate office. The model (i) can cope with settings involving all types of owners and rights: owners that can be internal to the industry (rival firms) and external to the industry; and rights that can capture financial and corporate control interests, can be direct and indirect, can be partial or full, (ii) yields an endogenous measure of the owners ultimate corporate control rights, and (iii) can also be used - in case the potential acquisition is inferred to likely enhance market power - to devise divestiture structural remedies. We also provide an empirical application of the two proposed generalized indicators to several acquisitions in the wet shaving industry, with the objective of providing practitioners with a step-by-step illustration of how to compute them in antitrust cases.
... They consider, instead, limiting corporate control arrangements that involve either full in ‡uence or no in ‡uence at all in the …rm's decisions. 3 The second direction is taken by Flath (1992), who maintains Reynolds and Snapp (1986)'s focus on …nancial rights but introduce the distinction between direct and indirect rights. He models the latter by noting that if (i) the aggregated pro…t of a …rm is a function of the operating pro…t of the …rm and the aggregated pro…t of the rival …rms (in which it holds …nancial rights), and (ii) the same is true for all …rms in the industry, then we can write a system of aggregate pro…t equations that implicitly determines the aggregate pro…t of each …rm as a function of the operating pro…t of all the …rms in the industry over which the …rm holds …nancial rights, either direct or indirectly. ...
... The theoretical framework typically employed in the literature to model both cross-and commonownership is rooted in Brito, Ribeiro and Vasconcelos (2014). They combine a cross-ownership model in the lines of Reynolds and Snapp (1986) and Flath (1992) with a common-ownership model in the lines of O'Brien and Salop (2000). The resulting theoretical framework can cope with acquisition settings involving internal and external owners as well as …nancial and corporate control rights that can be direct and indirect, partial or full. ...
... Dietzenbacher, Smid and Volkerink (2000), on the other hand, maintain Reynolds and Snapp (1986)'s focus on …nancial rights and extend their proposal to indirect rights. They build on the theoretical framework of Flath (1992) to develop a modi…ed HHI to screen the unilateral e¤ects of acquisitions inducing a cross-ownership of direct and indirect …nancial rights. ...
Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose a generalization of the two most traditional indicators used to screen unilateral anti-competitive effects - the Herfindahl-Hirschman Index and the Gross Upward Price Pressure Index - to partial horizontal acquisition settings. The proposed generalized indicators are endogenously derived under a probabilistic voting model in which the manager of each firm is elected in a shareholder assembly between two potential candidates who seek to obtain utility from an exogenous rent associated with corporate office. The model (i) can cope with settings involving all types of owners and rights: owners that can be internal to the industry (rival firms) and external to the industry; and rights that can capture financial and corporate control interests, can be direct and indirect, can be partial or full, (ii) yields an endogenous measure of the owners ultimate corporate control rights, and (iii) can also be used - in case the potential acquisition is inferred to likely enhance market power - to devise divestiture structural remedies. We also provide an empirical application of the two proposed generalized indicators to several acquisitions in the wet shaving industry, with the objective of providing practitioners with a step-by-step illustration of how to compute them in antitrust cases.
... In [14] the Authors prove that the linking of profits reduces each firm's incentive to compete and, in particular, they investigate the competitive effects posed by partial ownership arrangements. In [7] a profit formulation for indirect shareholding (i.e., when a firm holds shares in a different firm and that 100 U. MERLONE firm also holds shares in another firm) is introduced. The main result proves that, in industries with horizontal shareholding, cartelizing effects are compounded if firms are mindful also of indirect shareholding, and in this case the industry may become a monopoly. ...
... The Authors give evidence that empirical observations of shareholding interlocks differ from the prediction of the theoretical model but do not address explicitly this problem. Finally, it must be noted that while they realize that with the profit formulation introduced in [7] profit may be overcounted, their explanation for considering this particular profit formulation is not convincing. ...
... Furthermore we generalize the commonly used profit formulations and the proposed one in a single general expression. We derive an elegant expression for the Lerner index and discuss the approach used in the literature for studying the cartelizing effects; the mathematical analysis of some overlooked details allows to understand how this may undermine the theoretical results established in [7]. We provide a simple counterexample in order to show how optimal quantities may not always be defined and show that the fact that financial interest profitability depends on different marginal costs rather than holding per se, gives a simple motivation of the limited 2 and non-symmetrical shareholding interlocks found in the empirical literature. ...
Different profit formulations are considered when studying collusive effects of horizontal cross-shareholding. We propose a compact formula which generalizes the formulations used in the literature. By this compact formula we derive an expression for the Lerner index and discuss the cartelizing effects of shareholding interlocks. We provide a simple counterexample which allows to identify some inconsistencies of the approach commonly used in the literature. Finally we show how our approach can be extended to consider product differentiation.
... Thus, cross-holdings generate a consumer-hurting effect. Since then a growing literature has followed up on the work of Reynolds and Snapp (1986) to support the theory of harm, including Flath (1992), Dietzenbacher et al. (2000), Liu et al. (2018), and Ma and Zeng (2022), etc. 3 By introducing cost asymmetry into the homogeneous Cournot model, Farrell and Shapiro (1990) and Ma et al. (2021) demonstrate that cross-holding could benefit social welfare when a high-cost firm increases its ownership in a low-cost firm. In addition, in a Cournot duopoly, Fanti (2015) shows that cross-holding may raise social welfare when the solely-owned firm is less efficient than the other (cross-held) firm and the market size is not too large. ...
... Firms in the market are assumed to engage in cross-holdings. Following the literature, we assume throughout the paper that cross-holdings between firms are passive in the sense that each firm is entitled to a share of its target's profit but not decision making (see Farrell and Shapiro 1990;Flath 1992;Gilo et al. 2006;Ghosh and Morita 2017), i.e., 0 < < 1∕2 . We consider the following four different crossholding structures: 9 Case 1. efficient firms hold symmetric ownership shares in each others: each efficient firm i acquires a share, ∕(n − 1) , of ownership in each efficient rival firm. ...
Common wisdom suggests that cross-holdings can lead to significant output contraction, and thus hurt consumers. On the contrary, we demonstrate that cross-holdings may increase industry output and benefit consumers in an asymmetric Cournot oligopoly with the presence of a welfare-maximizing tax/subsidy policy. The government will strategically use the tax/subsidy policy to regulate the market outcomes in anticipation of the adverse effect of cross-holdings, which could raise industry output and benefit consumers in certain situations depending on the cost distributions and cross-holding structures.
... A number of papers have followed up on the work of Reynolds and Snapp (1986). Considering the effects of both direct and indirect cross holdings, Flath (1992) shows that competitive implications of cross holdings under this approach are qualitatively similar to those in Reynolds and Snapp (1986). Dietzenbacher et al. (2000) extend the analysis in Flath (1992) to a general n-firm setting and conduct empirical studies using the data of the Dutch financial sector to analyze the consequences of cross holdings. ...
... Considering the effects of both direct and indirect cross holdings, Flath (1992) shows that competitive implications of cross holdings under this approach are qualitatively similar to those in Reynolds and Snapp (1986). Dietzenbacher et al. (2000) extend the analysis in Flath (1992) to a general n-firm setting and conduct empirical studies using the data of the Dutch financial sector to analyze the consequences of cross holdings. The authors show that competition is reduced for both Cournot and Bertrand oligopolistic firms. ...
Existing studies on partial ownership usually overlook the effects of vertically related markets. Our paper highlights the importance of the upstream market on downstream firms' incentives to acquire partial ownership and the consequent welfare implications. In the main model, we assume that there are three firms in the downstream market, two of which may form a partial ownership arrangement. We find several results that are in contrast to those in the literature. First, the two firms will engage in partial ownership if the upstream market is an oligopoly (triopoly or duopoly). Second, partial ownership may raise total production, consumer surplus, and social welfare. This happens when the upstream market consists of a duopoly and the two firms involved in partial ownership are supplied by different suppliers. Third, the outsider, commonly known as a free rider in the literature, may become a victim of partial ownership. Our results are robust to several extensions, including a general n n‐firm framework, product differentiation, and uniform pricing by upstream firms. We also provide the conditions under which the curvature of the demand function and the convexity of the cost function motivate firms to form partial ownership.
... Viewing cross-ownership as "partial mergers", previous studies have focused mainly on the potential anticompetitive effects induced by cross-ownership [3,[8][9][10][11][12][13][14][15]. From a competition perspective, firms' partial internalization of previous rivalry due to cross-ownership decreases competition and thus is highly unlikely to be considered as welfare-improving unless there are substantial cost-savings associated with this activity. ...
... Once wind turbines or solar panels are installed, the marginal production cost of renewable energy is negligible.5 Clearly the value of the fixed cost F is important for the decision of whether or not to have the renewable source of energy installed.6 In an industry characterized by rival cross-shareholdings, the aggregate profits of a firm j include not only the stream of profits generated by the firm from its own operations, but also a share in its competitors' aggregate profits due to its direct and indirect ownership stakes in these firms[11,12].Content courtesy of Springer Nature, terms of use apply. Rights reserved. ...
This paper examines how corporate cross-ownership in a polluting fossil fuel oligopoly affects the value of a clean energy substitute with a given capacity in different environmental scenarios. When environmental damages are large enough, an increased cross-ownership among polluting firms reduces the gains from investment in the clean energy sector. However, if environmental damages are small enough, a non-marginal increase in cross-ownership may increase the value of a clean technology. The main intuition behind this result is that an increased cross-ownership results in a decrease of environmental damages due to an overall decrease of quantity of energy supplied by the polluting firms, and therefore, if environmental damages are large enough, there will be substantial gains from reduced pollution damages associated with it, thus decreasing the need for clean energy. However, if environmental damages are small enough, the welfare loss from a less intensified competition due to increased cross-ownership outweighs the possible benefits of reduced pollution, thereby increasing the value of a clean technology. Our qualitative conclusions hold true under different demand specifications.
... A number of papers followed Reynolds and Snapp (1986). Considering the effects of both direct and indirect cross holdings, Flath (1992) showed that competitive implications of cross holdings are qualitatively similar to those in Reynolds and Snapp (1986). 3 Liu et al. (2018) pointed out that the anticompetitive effects of cross holdings are more complex with asymmetric technologies. ...
... Our approach follows that of Farrell and Shapiro (1990a) and Flath (1991Flath ( , 1992. Suppose initially that firm holds a share, , of the stock of firm , ≠ . ...
This paper studies the endogenous formation of cross holding and its welfare implications in an asymmetric Cournot oligopoly with one acquiring firm holding passive ownership in one of its rivals. With the presence of cost asymmetry, we show that the acquiring firm will always choose to hold ownership in the most efficient rival. The optimal level of ownership is determined by market demand, the number, and cost distribution of firms. We further analyze the welfare implications of cross holding and characterize both socially excessive and insufficient cross holdings.
... Previous studies on cross-ownership have focused mainly on the potential anticompetitive effects induced by cross-ownership, i.e., unilateral effects (Reynolds and Snapp, 1986;Bresnahan and Salop, 1986;Farrell and Shapiro, 1990;Flath, 1991Flath, , 1992O'Brien and Salop, 2000;Dietzenbacher, Smid and Volkerink, 2000;Brito, Cabral and Vasconcelos, 2014;Brito, Ribeiro and Vasconcelos, 2014; and coordinated effects (Malueg, 1992;Gilo, Moshe and Spiegel, 2006;, and have thus proposed various modified measurement indexes -the Herfindahl-Hirschman Index and the Gross Upward Price Pressure Index -to account for it. However, what is missing in the literature is why and to what extent firms want to engage in cross-shareholdings. ...
... In an industry characterized by rival cross-shareholding, the aggregate profits of firm j, denoted by Π j , include not just the stream of profits generated by the firm from its own operations, but also a share in its competitors' aggregate profits due to its direct and indirect ownership stakes in these firms. 6 Following much of the literature (Flath, 1992;Dietzenbacher, Smid and Volkerink, 2000;Gilo, Moshe and Spiegel, 2006;Brito, Ribeiro and Vasconcelos, 2014), we thus model firm j's problem as ...
... A number of papers have followed up on the work of Reynolds and Snapp (1986). Considering the effects of both direct and indirect cross holdings, Flath (1992) shows that competitive implications of cross holdings under this approach are qualitatively similar to those in Reynolds and Snapp (1986). Dietzenbacher et al. (2000) extend the analysis in Flath (1992) to a general n-firm setting and conduct empirical studies using the data of the Dutch financial sector to analyze the consequences of cross holdings. ...
... Considering the effects of both direct and indirect cross holdings, Flath (1992) shows that competitive implications of cross holdings under this approach are qualitatively similar to those in Reynolds and Snapp (1986). Dietzenbacher et al. (2000) extend the analysis in Flath (1992) to a general n-firm setting and conduct empirical studies using the data of the Dutch financial sector to analyze the consequences of cross holdings. The authors show that competition is reduced for both Cournot and Bertrand oligopolistic firms. ...
... As pioneered by Reynolds and Snapp (1986), in Cournot competition, the equilibrium with cross-holding will become less competitive, with less aggregate output and higher prices. Much follow-up literature obtains similar results and investigates welfare implications under various market structures (Flath 1992;Reitman 1994;Fanti 2015;Ma et al. 2021;Chen et al. 2023;Li et al. 2022). In this paper, we explore the impact of passive cross-ownership on the choice of managerial delegation under vertical product differentiation. ...
We construct a vertical product differentiation duopoly model incorporating managerial delegation and cross-ownership. By exploring the interplay of these factors, we find a U-shaped relationship between endogenous managerial delegation coefficients and cross-ownership. The difference in managerial delegation coefficients between the two firms decreases as the cross-ownership proportion increases. In an ownership structure involving cross-ownership of firms producing different quality products, managerial delegation improves firms’ profits while reducing consumer surplus and social welfare in a vertical product differentiation market. Moreover, cross-ownership intensifies the positive impact of managerial delegation on joint profits and the negative effects on consumer surplus and social welfare. Consequently, regulating cross-ownership among firms in vertically differentiated product markets is an important policy issue for competition law.
... 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); 1 and (ii) to a lower likelihood of entry (Newham, Seldeslachts and Banal-Estanol, 2018). However, this internalization can also have a bright side by (i) promoting costreducing investments (Shelegia and Spiegel, 2015;Antón et al., 2018;López and Vives, 2019); ...
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.
... Além disto, essas estruturas podem contribuir para facilitar o fluxo de informações entre empresas em mercados caracterizados por informação incompleta através de relacionamentos formais e informais. A coordenação ex ante de planos de investimento e de transações também é importante (Richardson, 1972), possibilitando a redução dos riscos e dos custos de transação (Williamson, 1985;Flath, 1992;Kesler, 1992). A estrutura piramidal possibilita a mobilização de poupança interna (um corporate treasure) que poderia atuar como um surrogate ou de facto corporate venture capital, provendo recursos para a criação de novas empresas, ou ainda atuando na estabilização do desempenho das empresas existentes, evitando cenários muito ruins (Gerlach, 1992;Akyuz e Gore, 1996). ...
O processo de financeirização tem afetado a governança das empresas não-financeiras, pois impõe a convergência das firmas ao modelo anglo-saxão de propriedade dispersa, maximizadora de riqueza ao acionista. Para entender como a financeirização tem afetado a governança das empresas não-financeiras deve-se conhecer sua estrutura de propriedade e controle. O objetivo deste artigo é apresentar a estrutura de controle das empresas nãofinanceiras do Novo Mercado (NM) da BM&FBovespa no ano de 2012. A amostra é composta por 118 empresas não-financeiras e, a estrutura de controle foi aberta para trás até encontrar o último e os três últimos acionistas. Os resultados mostraram que as famílias e os indivíduos são os principais acionistas, mas houve um aumento da participação dos investidores institucionais, bem como uma redução na concentração do controle da propriedade. Palavras-chave: Financeirização, Governança Corporativa; Controle da Propriedade.
... Our paper is related to previous research on shareholding interlocks: Reynolds and Snapp (1986), Bresnahan and Salop (1986), Flath (1992). These papers are concerned with the case when firms own shares in rival firms, whereas we in addition consider the equally relevant case of shareholders who hold positions in more than one firm. ...
We develop a methodology for evaluating competition and welfare when shareholders hold (partial) positions in more than one competi- tor. We consider difierent models of product market competition and shareholder control. In each case, we derive consumer welfare as a function of shareholding Herflndahl indexes. We then apply our re- sults to estimate the efiect on consumer welfare of Portugal Telecom's (PT) divestiture of its subsidiary, PT Multimedia (PTM). Our results indicate that a sale to independent shareholders beneflts consumers considerably compared to a sale to current shareholders, as proposed by PT. Moreover, the impact of the divestiture is drastically difier- ent depending on whether PT's share is sold to PT's shareholders or PTM's shareholders.
... The competitive effects of the different types of control are discussed and it is established, among others, that independence of the joint venture is more competitive than any form of silent financial interest or limited joint control and that silent financial interest is more competitive than limited joint control, full ownership by one parent or control by one parent. 1 Flath (1992) contributes to this literature by considering both direct (as in Bresnahan and Salop (1986) and Reynolds and Snapp (1986)) and indirect financial shareholding. Firm A indirectly holds shares in firm C if it holds shares in firm B and, in turn, firm B holds shares in firm C. The anticompetitive effects are greater in this case than when only direct holdings are considered. ...
Owning a share of a competitor's stock lessens the degree of oligopoly competition. In this paper, we explore this theme by considering dif-ferent forms of ownership (voting and non-voting shares) as well as different divestiture options. Among other results, we show that turn-ing voting shares into non-voting shares increases consumer surplus; and selling the voting shares to a large shareholder is better than selling it to small shareholders. Perhaps more surprisingly, we pro-vide conditions such that a partial sale of voting shares is worse than turning those shares into non-voting shares.
... This di¤erence is important be-cause investments by controllers do not feature the complex chain-e¤ect interaction between the pro…ts of rival …rms which is a main focus of our paper. Other papers that look at the competitive e¤ects of PCO include Reynolds and Snapp (1986), Bolle and Güth (1992), Flath (1991Flath ( , 1992, Reitman (1994), and Dietzenbacher, Smid, and Volkerink (2000). These paper however examine the unilateral e¤ects of PCO arrangements in the context of static oligopoly models. ...
We examine the e¤ects that passive investments in rival …rms have on the incentives to collude when …rms have asymmetric marginal costs. We …rst show that unilateral investments by the most e¢ cient …rm in rivals may not only facilitate collusion but also raise the collusive price. We also show that the most e¢ cient …rm prefers to invest in its most e¢ cient rival and only if this investment is insu¢ cient to sustain collusion will it begin to invest in less e¢ cient rivals. We then consider multilateral passive investments in rivals and show that an increase in such investments never hinders tacit collusion and we establish necessary and su¢ cient conditions for such investments to strictly facilitate tacit collusion. We thank seminar participants in Ben Gurion University, INSEAD, TILEC, and University of Vienna and the Institut for advanced studies in Vienna.
Firms can form partial passive ownership arrangements by acquiring equity shares in competitors' profits. We consider a duopoly model in which products are differentiated along both vertical and horizontal dimensions and one firm may acquire the other firm's equity shares before they engage in strategic competition. We identify equilibrium equity shares and characterize how the choice of equity shares depends on three previously unexplored factors: (i) the size of the market, (ii) the degree of horizontal product differentiation and (iii) the degree of vertical product differentiation. Whether an increase in the size of the market increases firm's incentive to hold a stake in the rival depends on whether the acquiring firm is a high‐quality firm or a low‐quality firm. The effect of vertical product differentiation also depends on the type of the acquiring firm, high‐quality vis‐à‐vis low‐quality. On the contrary, an increase in horizontal product differentiation can increase firm's incentive to hold a stake in the rival, irrespective of the type of the acquiring firm. We also find that the equilibrium levels of consumer welfare and social welfare may be lower compared to the case of no partial passive ownership.
Bagaturia, Shota. 2020. Rebuilding American Economic Soft Power Through Antitrust Law.
Master's thesis, Harvard Extension School.
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.
This paper examines how cross‐border ownership and restrictions affect commercial policies optimally chosen by the government of an importing country. Focusing on import competition in an oligopoly market served by two local producers and a foreign firm, we study and compare two partial ownership arrangements without corporate control: unilateral ownership by the foreign firm over a local producer and bilateral ownership between the two entities. The main findings are as follows: (i) When foreign ownership is unilateral, the optimal trade and industrial policies are an import tariff and a production subsidy, respectively. (ii) When foreign ownership is bilateral, the trade policy can be an import subsidy, and the industrial policy is a production subsidy. These results differ from the benchmark equilibrium without ownership, under which the optimal policy mix consists of an import tariff and a production subsidy. (iii) Unilateral foreign ownership always reduces domestic welfare. However, bilateral foreign ownership can increase domestic welfare when local producers' cost disadvantages are substantially high. (iv) Considering the usual lump‐sum transfer for a balanced budget, bilateral ownership entails a lower public burden than two other scenarios for the government to finance its strategic use of trade and industrial policies.
Since the beginning of the last century, the interest of economic science has been drawn to corporate interconnections, their connection with the financial system, the formation of alliances, and their relationship with political power. With the development of mathematics, especially graph theory, this interest was boosted. This chapter is intended as an introduction to matters related to the interconnection of corporates. Firstly, graph theory is analyzed at a rudimentary level, and its several forms are described that have been employed by economics, and social sciences in general. Two basic kinds of relationships are distinguished, which are then further specialized: interlocking directorate and interlocking ownership. An analysis is offered of these two aspects and their significance, along with an overview of the bibliography. The several forms of corporate interlocks existing worldwide are then presented in a broad outline. Following this, we focus on the cases found in Greek business networks. The lowest level of interconnections obtains, compared to the rest of Europe, and the similarities with the rest of the European countries are noted in the logic of the network’s articulation. Finally, the chapter concludes with the possibilities and prospects of research into social network analysis in business.KeywordsCorporate InterconnectionsNetworksOwnershipManagement Structures
This chapter outlines the main traits of the EU28EU28 Aerospace Industry network (EASINEASIN) and its neighborsNeighbors in terms of the main statistical and structural features. We will provide the crucial data to have the basic idea of the importance of this industry in terms of turnover, employees, equity capital and assets, as well in geographical and structural terms. We will show the distributions of both the connected and the isolatedIsolates companies that operate within this industry and the efforts of people-based coordination that the former employ. We will further present a precise quantitative relevance the three types of coordination, which will be deepened in the following chapters. Finally, we will give the essential data about the two types of coordinators who issue those three types: managers and directors.
This paper analyzes strategic environmental policy when polluting firms engage in overlapping ownership arrangements (OOAs) under differentiated duopoly with quantity competition. Specifically, we focus on two pollution control instruments: emission taxes and standards. The key findings are as follows: (i) Compared to the case without ownership, the optimal environmental tax rate and absolute standard are higher (lower) when the polluting firms’ products are complements (substitutes). (ii) Both the tax and standard policies are equally efficient in their effects on the firms’ output and abatement decisions, consumer surplus, environmental quality, and social welfare, regardless of whether the differentiated products are complements or substitutes. (iii) If the government sets equity share and emission tax (or standard) simultaneously to maximize social welfare, the optimal equity share may exceed 50% for OOA firms producing two complements and is inversely related to the degree of product complementarity. Our results have welfare implications for the choice of environmental regulation between taxes and standards, when equity share is exogenous, or when the government determines an optimal mix of equity share and emission tax (or standard).
We examine the profitability of cross-ownership in a nonrenewable resource oligopolistic industry where firms compete as Cournot rivals. Assuming a subset of the oligopolists own a share in each other’s profits, we show that a symmetric cross-ownership can be profitable for any number of participating firms, provided that the initial resource stock owned by each firm is small enough. This is in sharp contrast with the static case where for any levels of non-controlling minority shareholdings, a symmetric cross-ownership is never (always) profitable if the relative number of participating firms is below (above) some lower (upper) threshold. When the relative number of participating firms is in between the two thresholds, profitability of cross-ownership depends on the level of shareholdings. We also highlight that cross-ownership can be preferable to a horizontal merger in terms of Cournot competition. Not only is it more profitable to do so, more importantly, it constitutes a shrewd strategy to avoid the possible legal challenges. Finally, we show that cross-ownership may turn out to be relatively less detrimental to society in a nonrenewable resource industry than other industries where resource constraints are absent. Thus, a specific analysis is needed when dealing with industries where resource constraints play an important role.
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.
This paper explores the effect of market concentration of the Norwegian oil production sector (NPS) on Norway’s second‐largest industry, the oilfield services companies (OFS). To capture this effect, we use the system generalized method of moments approach (GMM) to estimate an empirical model, spanning the period 1993‐2013. The findings indicate that increased market concentration is consistent with lower profitability of the oilfield services companies, as the bargaining power of oil companies relative to service companies increases. Increased knowledge about this effect could contribute to improving strategies for the further development of these industries by stakeholders.
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.
We model an industry where a subset of firms is interlinked via a mutual and symmetric share exchange agreement. A merger aiming at acquisition of market power can be reproduced by the same firms under a symmetric cross-ownership scheme. Both concentration and market power indices increase due to cross-ownership. Under linear demand, a non-controlling symmetric cross-ownership scheme is always advantageous to each members if at least 0.59 (1+n) firms in an n-firm industry participate. The threshold drops to (1+n)/2 for relatively low levels of cross-ownership. Last, we show that cross-ownership schemes require fewer participants than mergers to be advantageous and can always be more profitable than mergers, unless a merger involves more than 88 per cent of industry firms.
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.
This paper analyzes two pollution control instruments, uniform taxes and absolute standards, when polluting firms engage in partial ownership arrangements (POAs). Specifically, we examine the case of a bilateral POA between competing firms in which both hold equity shares on each other's profits as silent investments. We show that taxes and standards are equally efficacious in affecting the firms' output decisions and pollution emissions. Compared to the social planner's solution, a bilateral POA results in suboptimal outcomes with lower industrial output and consumer surplus. Firm profits are higher and environmental quality improves (since emissions decline), but social welfare decreases. We compare the equilibrium results associated with two different types of POAs (bilateral vs. unilateral), and examine their differences in welfare implications for the choice of policy options between taxes and standards.
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.
A profit formulation of cross-shareholding among firms was presented based on feedback control principle. Constructing a two-stage game, we focused on the equilibrium strategy and market performance of two firms in Cournot duopoly with cross-shareholding. The equilibrium strategy, which consists of two firms' equilibrium equities and equilibrium outputs, was solved by backward induction. The results show that the equilibrium strategy under cross-shareholding always increases each firm's profit, so as to realize a win-win situation between two rivals, no matter the products are substitutes or complements. However, in the case of substitute products, cross-shareholding reduces consumer surplus and economic welfare.
The question of whether and how partial common-ownership links between strategically interacting firms affect firm objectives and behavior has been the subject of theoretical inquiry for decades. Since then, the growth of intermediated asset management and consolidation in the asset management sector has led to more pronounced common-ownership links at the beneficial-owner level. Recent empirical research has provided evidence consistent with the literature’s prediction that common-ownership concentration (CoOCo) can affect product market outcomes. The resulting antitrust concerns have received worldwide attention. However, because CoOCo can change the objective function of a firm, the potential implications span all fields of economics that involve corporate conduct, including corporate governance, strategy, industrial organization, and financial economics. This article connects the papers establishing the theoretical foundations, reviews the empirical and legal literatures, and discusses challenges and opportunities for future research. Expected final online publication date for the Annual Review of Financial Economics Volume 10 is November 1, 2018. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
Many natural competitors are jointly held by a small set of large institutional investors. In the U.S. airline industry, taking common ownership into account implies increases in market concentration that are 10 times larger than what is “presumed likely to enhance market power” by antitrust authorities. Within‐route changes in common ownership concentration robustly correlate with route‐level changes in ticket prices, even when we only use variation in ownership due to the combination of two large asset managers. We conclude that a hidden social cost – reduced product market competition – accompanies the private benefits of diversification and good governance.
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Some models of industries with horizontal shareholding interlocks are generalized. First, we consider industries where firms exhibit different technologies and more general market demand functions. The cartelizing effects of financial interlocks are examined using both the Lerner index and the Herfindahl–Hirshman index. Furthermore, the model is extended to consider multiproduct oligopolies. We find a compact expression for the Lerner index and study the cartelizing effects of such an industry.
With this work is my intention to approach a theme that is connected to the competition policy and industrial organizations areas. I speak more precisely about the use of concentration index in competition policy or more clearly, the use of the
Herfindahl-Hirschman
Index (HHI). This is an index that is used in most countries of the EU, including Portugal, and by the European Commission as well as by the FTC and the DoJ in the USA, and in other jurisdictions. However, it can emerge some situations where this index needs to be adjusted, namely when there exist cross ownerships between firms operating in a relevant market under analysis. In this sense, besides the investigation of the literature that proposes different adjustments to this index, I try to show by, including those cross-ownership when estimating the HHI, its adjusted value, will, in most cases come out larger when compared with a non adjusted HHI
The main objective of this study is to deepen the understanding of business network development processes and their antecedents. In addition, the study aims to clarify how strategic intent and shared identity can be formed at the business network level. To this end, the practices related to network strategy and sense-making processes in three different business networks were compared. The study applies the system approach to networks and examines how network structure and internal mechanisms influence the development process. The goal of the study is to utilise knowledge management and an organisational change approach in business networks and their development. The framework is two-sided, consisting of the network development cycle and the typology of knowledge management within strategic business networks. The framework is constructed in light of earlier research and utilised in the selection of cases. At the conceptual level, the concepts of business network, strategic intent and shared identity are also clarified. The empirical part describes network development processes in three different technology industry networks. Case A (and, to an extent, Case B) represents vertical production networks managed by the core company; Case C represents an innovation network between equal partners. The case studies lasted between one and two and a half years. The development path of each different case network was constructed on the basis of the theoretical framework. Case data were reviewed using the key questions related to this processual phenomenon: "why", "how" and "what." Based on the case studies and the theoretical framework, two models of network renewal were constructed. These models can be used by managers of business networks to evaluate their networking and development practices. As a result, the network renewal models can also deepen the understanding of network development and change. Nonetheless, knowledge management practices and knowledge types in different networks or different phases of network development are obvious topics for future research. Examining entrepreneurship and SMEs could also shed new light on business networks as a strategic choice. Network strategies can serve to structure, organise and give meaning to the complex operations of business networks. A common sense-making process facilitates the formation of shared identity and norms between network members. The study is structured as follows. Chapter 1 introduces the research objectives, methods and data. The key concepts, such as business networks and network organisations, are defined in Chapter 2. Chapter 3 briefly reviews the existing research on business networks and presents the preliminary framework of network typologies. Chapter 4 delves more deeply into the theory of network management and development. Chapter 5 presents the theoretical background of organisational change and knowledge management. Chapter 6 outlines the research methods and provides empirical evidence of the network development in the three case networks. The observations are discussed in Chapter 7 in light of the theoretical framework. Chapter 8 concludes with the network reform model, the evaluation of research and the implications for further research.
We examine the consumer welfare effect of a firm’s partial ownership of a competitor and compare the implications of alternative forms of divestiture. We identify conditions under which turning voting shares into non-voting shares is preferable to selling the shares to the firm’s current shareholders (an option frequently chosen). We also show that selling the voting shares to a large independent shareholder is preferable to selling them to small shareholders. We provide additional theoretical results and apply them to the divestiture of Portugal Telecom’s holdings in PTM.
We show that the Bertrand oligopoly model with cost asymmetries may admit multiple Nash equilibria when firms hold passive ownership stakes in each other. The equilibrium price may be as high as the monopoly price of the most efficient firm.
The Herfindahl--Hirschman Index is one of the most commonly used indicators to detect anticompetitive behaviour in industries. In fact, an increase in the value of the index is usually interpreted as an indicator of actions which may lessen competition or even create a monopoly. In this article we show that this is not always the case, since in certain instances it is impossible to detect cooperation. We also show an example when competition even has a decreasing effect on the value of the index.
While most researchers in industrial organization agree that the neoclassical, cost-minimizing, unitary, view of the firm is restrictive, it is still the main object of anlysis in the literature. We review the literature in industrial organization and the place occupied by a richer view of the firm both before and after Grossman & Hart (1986) (GH). Before GH, integration was viewed as a way to alleviate hold-up problems, agency or market power distorsions; GH pointed out that integration and ownership reallocation create their own incentive problems. We show how this insight can enrich the usual analysis of firms with market power but also opens the door for a rich set of questions in more competitive environments.
Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose an empirical structural methodology, which can deal with settings involving all types of owners and ownership rights, to quantify the coordinated effects of partial horizontal acquisitions on differentiated products industries, by evaluating the impact of such acquisitions on the minimum discount factors for which coordination can be sustained. We also provide an empirical application of the methodology to several acquisitions in the wet shaving industry that give rise to cross- and common-ownership structures. The results are as follows (i) the incentives to coordinate of the firms that the acquiring party is - pre-acquisition - able to influence are non-decreasing with any acquisition; (ii) the incentives to coordinate of the acquired firm are non-decreasing with acquisitions involving full or partial both financial and corporate control rights, but non-increasing with acquisitions involving full or partial solely financial rights; and (iii) the incentives to coordinate of the remaining firms in the industry are non-increasing with any acquisition. This implies that the coordinated effects of partial horizontal acquisitions are, in general, ambiguous, which illustrates the importance of an empirical structural methodology.
Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose an empirical structural methodology to examine quantitatively the unilateral impact of partial horizontal acquisitions. The acquisitions may be direct or indirect, and may or may not correspond to control. The proposed methodology simulates the effects on prices, market shares, firm profits and consumer welfare. It can deal with differentiated product industries and nest full mergers as a special case. We provide an empirical application to several acquisitions in the wet shaving industry.
Cross shareholding as a type of institutional arrangement is discussed from institution innovation perspective. Upon providing a brief introduction of previous study on cooperate cross shareholding, this paper first discusses the main body and their own motivations of this institutional change, then conducts path dependent analyses on the political and economical background of this institutional change, the causes and conditions of institutional change, the mode and process of institutional change and the character of institutional change. In depth analysis is preceded on the influence of this institutional arrangement on economic performance from several aspects, which including economical efficiency of scale, technical and economic feasibility, risk management ability, market failure and externality prevention. Finally, after further comment on its practical value on regional economic cooperation and global economic integration, making timely and appropriate use of the cross shareholding in the process of restructuring of state-owned enterprises, upgrading and updating of private enterprises and the transition of national industrial structure is highly recommended.
We study a differentiated product market in which an investor owns a controlling stake in one of two competitors. We characterize her decision to invest in a stake in the other com-petitor, or to initiate a cross ownership arrangement, and analyze the dependence of the equilibrium allocation of ownership and control rights on the initial ownership structure in the economy. We find that both partial and full acquisitions may occur. In some cases, cross ownership arrangements between firms are important, whereas in others they are dominated by a direct investment of investors.
A joint venture among competitors to produce output alters the parents' competitive incentives. Any joint venture involves both joint financial interest and control over the production levels of the venture entity and the parent firms. The competitive incentives of the parents and rival firms depend on the exact financial interest and control arrangements made. This paper analyzes a number of alternative arrangements within the standard non-cooperative oligopoly model and devises a Modified Herfindahl-Hirshman Index (MHHI) to quantify their relative competitive incentives. Independent entry by a single parent and a full merger of the parents may be viewed as particular financial interest and control arrangements. The use of this methodology for policy analysis of proposed ventures is illustrated with the facts of the recent GM-Toyota joint venture.
Antitrust authorities should consider the trade-off between enhanced efficiency and reduced competition in cases of partial ownership. This paper examines the competitive effects side of that trade-off in the context of a modified Cournot model. We show that, in markets where entry is difficult, partial ownership arrangements could result in less output and higher prices than otherwise, even if the ownership shares are relatively small. These effects arise solely because these arrangements link the fortunes of actual or potential competitors, producing a positive correlation among their profits. In this sense, the effects are purely structural: they arise not because of increased opportunities for collusion or changes in the concentration of control, but because the linking of profits reduces each firm's incentive to compete. Since these links internalize free rider problems associated with policing collusion and investing in entry deterrence, however, they could also enhance cartel stability and profitability.
The economic effects of partial equity interests and joint ventures. US Department of Justice Antitrust Division Economic Policy Office Discussion Paper
- R J R Reynoldsandb
- Snapp