Oligopoly with Shareholder Voting

Abstract

This paper recovers and extends unpublished results from the oligopoly with the shareholder voting model of Azar (2012). In particular, we generalize the model to allow for managerial entrenchment. The general model nests the worldviews of both the proponents and skeptics of the common ownership hypothesis, as well as intermediate cases. Without managerial entrenchment, the firms act in equilibrium as if they maximized a weighted average of shareholder utilities. However, when managers are entrenched, firms maximize a weighted average of shareholder and managerial utilities. The weights are endogenous and can be traced back to the parameters of the voting model. Under some conditions, the voting model implies that the oligopolistic equilibrium when all shareholders hold market portfolios is equivalent to a monopolistic equilibrium in which all firms are merged. This is true even if shareholders with market portfolios have heterogeneous objectives. However, with managerial entrenchment, this equivalence result breaks down, as the oligopoly equilibrium is closer to the no-common-ownership case. Furthermore, we show that, when shareholders are consumers, wealth inequality increases equilibrium markups, but the slope of this relation becomes less steep as managers become entrenched.