Active ownership relations in oligopoly

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Active ownership relations in oligopoly

• Frode Skjeret,
• Institute for Research in Economics and Business
  Administration

2
Introduction

• Partial ownership relations

3
Introduction

• Partial ownership relations
• Passive Ownership Relations
• Cases where control is kept in partially acquired
  firm
• Both empirically and theoretically analysed

4
Introduction

• Partial ownership relations
• Passive Ownership Relations
• Cases where control is kept in partially acquired
  firm
• Both empirically and theoretically analysed
• Active Ownership Relations
• Cases where control is transferred
• Less analysed in the literature

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Introduction (contd.)

• Competition Policy Merger Equivalent Approach
• Passive Ownership relation No action
• Active Ownership relation Regarded as monopoly

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Introduction (contd.)

• Competition Policy Merger Equivalent Approach
• Passive Ownership relation No action
• Active Ownership relation Regarded as monopoly
• Critique of the first
• Firms have incentives to reduce output
• Outside firms do not fully counteract

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Introduction (contd.)

• Competition Policy Merger Equivalent Approach
• Passive Ownership relation No action
• Active Ownership relation Regarded as monopoly
• Critique of the first
• Firms have incentives to reduce output
• Outside firms do not fully counteract
• Critique of the second (current paper)
• Controlling firm may reduce overall output
• Outside firms do not fully counteract

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Theory

• Traditional Cournot (duopoly model)
• 2 firms and 2 identical plants

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Theory

• Traditional Cournot (duopoly model)
• 2 firms and 2 identical plants
• Each firm owns 1 plant each 100

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Theory

• Traditional Cournot (duopoly model)
• 2 firms and 2 identical plants
• Each firm owns 1 plant each 100
• Firm 1 purchases a share in firm 2

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Theory

• Traditional Cournot (duopoly model)
• 2 firms and 2 identical plants
• Each firm owns 1 plant each 100
• Firm 1 purchases a share in firm 2
• Profit Maximising firms

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Theory

• Traditional Cournot (duopoly model)
• 2 firms and 2 identical plants
• Each firm owns 1 plant each 100
• Firm 1 purchases a share in firm 2
• Profit Maximising firms
• Demand has the general properties

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Theory

• Traditional Cournot (duopoly model)
• 2 firms and 2 identical plants
• Each firm owns 1 plant each 100
• Firm 1 purchases a share in firm 2
• Profit Maximising firms
• Demand has the general properties
• Costs are assumed convex

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Tunnelling

• Controlling firm
• May have incentives to reduce output in partially
  held plant
• Increase in price cet par

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Tunnelling

• Controlling firm
• May have incentives to reduce output in partially
  held plant
• Increase in price cet par
• May therefore also have incentives to increase
  production in fully owned plant
• Controlling firm extracts profits in excess of
  what its ownership share warrants
• Exchanges for 1

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Welfare loss

• Controlling firm acts as multiplant monopolist
• Reduced output from plant 2

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Welfare loss

• Controlling firm acts as multiplant monopolist
• Reduced output from plant 2
• Increase in prices gives incentives to ramp up
  production in plant 1

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Welfare loss

• Controlling firm acts as multiplant monopolist
• Reduced output from plant 2
• Increase in prices gives incentives to ramp up
  production in plant 1
• Convex costs lead to lower increase in production
  from plant 1 than fall in plant 2

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Welfare loss

• Controlling firm acts as multiplant monopolist
• Reduced output from plant 2
• Increase in prices gives incentives to ramp up
  production in plant 1
• Convex costs lead to lower increase in production
  from plant 1 than fall in plant 2
• Consumer surplus falls

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Welfare loss

• Controlling firm acts as multiplant monopolist
• Reduced output from plant 2
• Increase in prices gives incentives to ramp up
  production in plant 1
• Convex costs lead to lower increase in production
  from plant 1 than fall in plant 2
• Consumer surplus falls
• Producer surplus falls

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Graphical illustration (duopoly)
Quantities
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Graphical illustration (duopoly)
Quantities
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Graphical illustration (duopoly)
Quantities
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Graphical illustration (duopoly)
Quantities
Profits
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Graphical illustration (duopoly)
Quantities
Profits
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Graphical illustration (duopoly)
Quantities
Profits
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Conclusion

• Controlling firm may tunnel resources
• Which implies a non-cost efficient production
  plan
• Price rises above monopoly level
• Competition authorities understate societal cost
  from active ownership relations when using the
  Merger Equivalent framework