Portfolio Diversification, Market Power, and the Theory of the Firm

42 Pages Posted: 20 Jul 2016 Last revised: 30 Jan 2017

José Azar

University of Navarra, IESE Business School

Date Written: January 30, 2017

Abstract

This paper develops a model of firm behavior in the context of oligopoly and portfolio diversification by shareholders. Competition for shareholder votes among potential managers seeking corporate office leads to internalization and aggregation of shareholder objectives, including shareholdings in other firms, and the fact that shareholders are consumers and workers of the firms. When all shareholders hold market portfolios, firms that are formally separate behave as a single firm. I introduce new indices that capture the internalization effects from consumer/worker control, and discuss implications for antitrust, stakeholder theory, and the boundaries of the firm.

Keywords: Common Ownership, Theory of the Firm, MHHI, Oligopoly, Stakeholder Theory, Firm Boundaries

JEL Classification: L41, L10, G34

Suggested Citation

Azar, José, Portfolio Diversification, Market Power, and the Theory of the Firm (January 30, 2017). Available at SSRN: https://ssrn.com/abstract=2811221 or http://dx.doi.org/10.2139/ssrn.2811221

José Azar (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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