[Séminaire Caen] How Competition Modes and Firm Failure Risk Shape Endogenous Common ownership? - UFR SEGGAT - MRSH

Abstract:
Empirical studies highlight the increasing prevalence of common ownership and its potential anticompetitive effects, notably higher prices (Backus et al., 2021; Azar et al., 2018). Theoretical models suggest common ownership reduces competition, but most treat its extent as an exogenous parameter (Lopez and Vives, 2019; Xu et al. 2022). A notable exception is Shy and Stenbacka (2020), who model endogenous common ownership in a Cournot duopoly, finding asymmetric ownership emerges in equilibrium.
Our paper extends their framework in two key ways. First, we introduce differentiated products and we compare Bertrand with Cournot competition. Second, we add an independent probability of firm failure. This generates a tension between private and social incentives: diversification through common ownership provides investors with both risk-sharing benefits and higher expected profits by softening competition, while simultaneously reducing consumer surplus and total welfare.
Our results show that the mode of competition plays a crucial role in shaping equilibrium ownership patterns. Under Bertrand competition with sufficiently low product differentiation, a symmetric equilibrium emerges where both investors optimally diversify (an outcome that never arises under Cournot competition). Although common ownership always reduces total welfare relative to full specialization, we find that the welfare loss is smaller under partial common ownership than under full common ownership. Finally, we characterize the ownership configuration that minimizes investors' portfolio variance, demonstrating its dependence on the intensity of competition and firm failure risk.

(joint with Nicolas Le Pape)