Cross Holding and Imperfect Product Markets

25 Pages Posted: 11 Nov 2008

See all articles by Matthew J. Clayton

Matthew J. Clayton

University of Virginia - McIntire School of Commerce

Bjorn Jorgensen

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 1999

Abstract

We consider a setting in which two firms first choose equity positions in each others stock (cross holdings) and then compete in an imperfect product market. We demonstrate that cross holdings lead to higher firm profits and higher consumer surplus when the competitors products are complements. We find that cross holdings lead to lower firm profits and higher consumer surplus when the products are substitutes. This finding is in contrast to the existing literature which establishes that cross holdings leads to higher firm profits and to lower consumer surplus. The contrasting results emerge because we solve for optimal cross holdings, whereas the existing literature considers exogenous cross holdings. In addition, allowing optimal cross holdings improves economic welfare. Furthermore, we demonstrate that cross holdings deter entry when the products are substitutes and facilitate entry when the products are complements.

Suggested Citation

Clayton, Matthew J. and Jorgensen, Bjorn N, Cross Holding and Imperfect Product Markets (September 1999). NYU Working Paper No. FIN-99-058, Available at SSRN: https://ssrn.com/abstract=1298331

Matthew J. Clayton (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
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Bjorn N Jorgensen

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

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

HOME PAGE: http://www.lse.ac.uk/accounting/people/bjorn-jorgensen

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