Overlapping Ownership, Endogenous Quality, and Welfare

15 Pages Posted: 23 Dec 2019 Last revised: 4 Jan 2021

See all articles by Duarte Brito

Duarte Brito

New University of Lisbon

Ricardo M. Ribeiro

Universidade Católica Portuguesa, Católica Porto Business School

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP)

Date Written: November 27, 2019

Abstract

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

Brito, Duarte and Ribeiro, Ricardo and Vasconcelos, Helder, Overlapping Ownership, Endogenous Quality, and Welfare (November 27, 2019). Economics Letters, Vol. 190, 2020, Available at SSRN: https://ssrn.com/abstract=3494482 or http://dx.doi.org/10.2139/ssrn.3494482

Duarte Brito

New University of Lisbon ( email )

1099-085 Lisboa, 1099-085
Portugal

Ricardo Ribeiro (Contact Author)

Universidade Católica Portuguesa, Católica Porto Business School ( email )

Rua Diogo Botelho, 1327
Porto, 4169-005
Portugal
+351-22619-6200 (Phone)
+351-22619-6291 (Fax)

HOME PAGE: http://ricardomribeiro.github.io/

Helder Vasconcelos

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Dr. Roberto Frias
s/n
4200-464 Porto, 4200-464
Portugal

HOME PAGE: http://www.fep.up.pt/docentes/hvasconcelos

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