Diversification vs. Monopolization: A Laboratory Experiment

48 Pages Posted: 27 Dec 2022 Last revised: 7 Apr 2023

See all articles by Jonas Frey

Jonas Frey

University of Oxford - Said Business School

Axel Ockenfels

Max Planck Institute for Research on Collective Goods; University of Cologne - Department of Economics

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Date Written: December 24, 2022

Abstract

We study in a highly abstract laboratory setting whether and how subjects in the role of shareholders use the stock market to monopolize product markets. We find that shareholders holding stakes in product market rivals choose compensation packages for subjects in the role of managers that reward the latter to reduce production. Many managers act in accordance with their incentives, thus raising prices and firm profits. Although the experimental environment features no risk, most shareholders actively choose to diversify their portfolio across competitors, which gives them subsequent incentives to incentivize rival firms' managers to act as part of a monopoly.

Keywords: diversification, common ownership, agency, executive compensation, experimental corporate governance

JEL Classification: D22, D43, G11, G32, G41

Suggested Citation

Frey, Jonas and Ockenfels, Axel and Schmalz, Martin C. and Schmalz, Martin C., Diversification vs. Monopolization: A Laboratory Experiment (December 24, 2022). Available at SSRN: https://ssrn.com/abstract=4311529 or http://dx.doi.org/10.2139/ssrn.4311529

Jonas Frey

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Axel Ockenfels

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

University of Cologne - Department of Economics ( email )

Albertus Magnus Platz
Cologne 50923
Germany

HOME PAGE: http://ockenfels.uni-koeln.de/

Martin C. Schmalz (Contact Author)

CEPR ( email )

London
United Kingdom

University of Oxford - Finance ( email )

United States

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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