Passive Investment as an Anticompetitive Commitment
Harvard Law School John M. Olin Disc. Paper 189 (96)
Posted: 7 Dec 1998
There are many cases in which a firm passively invests in its competitor. The Article presents an economic analysis resolving several ambiguities in the economics literature and showing how even totally passive investment in a competitor, in an industry with only a few firms, may substantially harm competition. In particular, passive investment will raise prices even when firms are not colluding. Moreover, passive investment by an inherently aggressive competitor in its rival facilitates collusion. Furthermore, when it is a firm's controlling shareholder who invests in the firm's competitor, the smaller the controller's stake in the firm it controls, the greater the anticompetitive effect. The Article further shows how firms can replicate this anticompetitive effect through their executive compensation packages: They can include components in these packages which are positively linked to industry or competitors' profitability. Recent cases of passive investment in a competitor have gone unchallenged by antitrust agencies. Moreover, the Article shows how the leading antitrust cases grant a de facto exemption for passive investment. This stems from their interpretation of the exemption for stock acquisitions that are "solely for investment" which is part of section 7 of the Clayton Act, the antitrust merger provision. The Article argues that the agencies' treatment of passive investment in a competitor, as well as the leading cases' interpretation of the "solely for investment" exemption, should be reconsidered.
JEL Classification: K21, L41, L13
Suggested Citation: Suggested Citation