Thursday, January 30, 2020

Overlapping Ownership, Endogenous Quality, and Welfare

Duarte Brito, New University of Lisbon, Ricardo Ribeiro, Universidade Católica Portuguesa, Católica Porto Business School, and Helder Vasconcelos, Universidade do Porto - Faculdade de Economia (FEP) identify Overlapping Ownership, Endogenous Quality, and Welfare.

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.

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