Overlapping Ownership, Endogenous Quality, and Welfare
15 Pages Posted: 23 Dec 2019 Last revised: 4 Jan 2021
Date Written: November 27, 2019
This paper investigates how overlapping ownership affects quality levels, consumer surplus, firms' profits and welfare when the industry is a vertically differentiated duopoly and quality choice is endogenous. This issue is particularly relevant since recent empirical evidence suggests that overlapping ownership constitutes an important feature of a multitude of vertically differentiated industries. We show that overlapping ownership while detrimental for welfare, may increase or decrease the quality gap, consumer surplus and firms' profits. In particular, when the overlapping ownership structure is such that the high quality firm places a positive weight on the low quality firm's profits, the incentives of the high quality firm to compete aggressively reduce. This may increase the equilibrium quality of the low quality firm, which in turn may lead to higher consumer surplus, despite higher prices.
Keywords: Overlapping Ownership, Vertical Differentiation
JEL Classification: L13, L41
Suggested Citation: Suggested Citation