Miguel Antón, Florian Ederer, Mireia Giné and Martin Schmalz ‘Common Ownership, Competition, and Top Management Incentives’ (2020) ECGI Working Paper Series in Finance 511/2017

The common ownership hypothesis suggests that, when large investors own shares in many firms within the same industry, those firms may have reduced incentives to compete. Empirical contributions document the rising importance of common ownership and provide evidence to support this hypothesis. However, because managers rather than investors control firm operations, scepticism that common ownership affects product market outcomes will be warranted until a mechanism for this process is identified. This has fuelled a vigorous debate on whether existing evidence on common ownership has a plausible causal interpretation. This paper, available here, develops a theoretical model that explains how managerial incentives can serve as a simple and plausible mechanism that links higher common ownership and softer product market competition. Under this model, firm-level variation in common ownership causes variation in managerial incentives across firms as well as variation in product prices, market shares, concentration and output across markets—all without communication between shareholders and firms, coordination between firms, or knowledge of…

José Azar and Xavier Vives on ‘General Equilibrium Oligopoly and Ownership Structure’ (2020) CEPR Discussion Paper No. DP15499

Oligopoly is widespread, and, allegedly, on the rise. Yet macroeconomic models, which focus on monopolistic competition instead because of its analytical tractability, seldom consider oligopoly. A typical limitation of monopolistic competition models is that market concentration plays no role in conditioning competition. Monopolistic competition models are also unable to look into the objective of the oligopolistic firm when there is overlapping ownership due to owners’ diversification. If a firm’s shareholders have holdings in competing firms, they would benefit from high prices through their effect not only on their own profits, but also on the profits of rival firms. This paper, available here, presents a tractable general equilibrium framework in which firms are large and have market power with respect to both products and labour, and in which a firm’s decisions are affected by its ownership structure. This framework characterises the oligopolistic market equilibrium, and then uses it to analyse whether competition intervention is appropriate, and if so how. Section II…