Overlapping ownership, endogenous quality, and welfare

Duarte Brito, Ricardo Ribeiro, Helder Vasconcelos

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

This paper investigates how overlapping ownership affects quality levels, consumer surplus, firms’ profits and welfare when the industry is a vertically differentiated duopoly and quality choice is endogenous. This issue is particularly relevant since recent empirical evidence suggests that overlapping ownership constitutes an important feature of a multitude of vertically differentiated industries. We show that overlapping ownership, while detrimental for welfare, may increase or decrease the quality gap, consumer surplus and firms’ profits. In particular, when the overlapping ownership structure is such that the high quality firm places a positive weight on the low quality firm's profits, the incentives of the high quality firm to compete aggressively reduce. This may increase the equilibrium quality of the low quality firm, which in turn may lead to higher consumer surplus, despite higher prices.

Original languageEnglish
Article number109074
JournalEconomics Letters
Volume190
DOIs
Publication statusPublished - 1 May 2020

Keywords

  • Overlapping ownership
  • Vertical differentiation

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