A New Look at Oligopoly: Implicit Collusion Through Portfolio Diversification

69 Pages Posted: 30 Jan 2012  

Jose Azar

Princeton University - Department of Economics

Date Written: November 8, 2011


In this paper, I develop a model of oligopoly with shareholder voting. Instead of assuming that firms maximize profits, the objective of the firms is decided by majority voting. This implies that portfolio diversification generates tacit collusion. In the limit, when all shareholders are completely diversified, the firms act as if they were owned by a single monopolist. In a model of general equilibrium oligopoly with shareholder voting, higher levels of wealth inequality and/or foreign ownership lead to higher markups and less efficiency. The empirical section of the paper studies the network of common ownership of publicly traded US corporations generated by institutional investors. I show that the density of the network more than tripled between 2000 and 2010. I explore the empirical relation between markups and networks of common ownership. The evidence is consistent with the hypothesis that common ownership acts as a partial form of integration between firms.

Keywords: Oligopoly, Portfolio Diversification, Shareholder Voting, Competition, Collusion, Corporate Social Responsibility, Institutional Investors

JEL Classification: G1, G2, G3, L1, L2, L4

Suggested Citation

Azar, Jose, A New Look at Oligopoly: Implicit Collusion Through Portfolio Diversification (November 8, 2011). Available at SSRN: https://ssrn.com/abstract=1993364 or http://dx.doi.org/10.2139/ssrn.1993364

Jose Azar (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

HOME PAGE: http://www.princeton.edu/~jazar/

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