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

Abstract:     
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.

Number of Pages in PDF File: 26

Keywords: Partial cross ownership, price-cost margins, tacit collusion, market power

JEL Classification: D43, L41, L89

working papers series