Ownership and Competition

Abstract

We develop a model in which the ownership structure and the degree of competition of industry rivals are jointly determined. Competing more aggressively improves an individual firm's performance but has negative externalities for its peers. Two types of investors endogenously arise in equilibrium. Common owners, who acquire positions in all firms and decrease competition. Undiversified investors, who acquire a position in only one firm and increase competition. As financial markets become more efficient, common ownership increases and competition decreases, which can lead to a disconnect between stock market efficiency and welfare. We derive further testable implications for ownership structure, product market competition, and welfare.

Keywords: common ownership, competition, corporate governance, real effects of financial markets

JEL Classification: D82, D83, G34