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Cross Holding and Imperfect Product Markets

23 Pages Posted: 7 Nov 2008  

Matthew J. Clayton

University of Virginia - McIntire School of Commerce

Bjorn Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting

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Date Written: January 1998

Abstract

We consider a two stage game where two firms first take positions in each other's equity (cross holding) and next compete in an imperfect product market. When the firms' products are substitutes, the optimal cross holding involves a short position in the competitor's equity, resulting in an equilibrium with larger quantities produced, lower firm and industry profits, and higher consumer surplus than an equilibrium where short-selling is prohibited. This provides a new rationale for short selling that does not rely on capital market imperfections, such as taxes or private information. In contrast, when two firms' products are complements, a long position in the competitor's equity is optimal, yielding higher quantities and lower prices which results in higher consumer welfare, and higher firm and industry profits.

Suggested Citation

Clayton, Matthew J. and Jorgensen, Bjorn, Cross Holding and Imperfect Product Markets (January 1998). NYU Working Paper No. FIN-98-020. Available at SSRN: https://ssrn.com/abstract=1296416

Matthew J. Clayton (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

Bjorn N Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting ( email )

Department of Accounting Room, OLD 2.17
Houghton Street
London, WC2A 2AE
United Kingdom

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