Diversification vs. Monopolization: A Laboratory Experiment

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