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Vertical cross-shareholding: Theory and experimental evidence

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  • Guth, Werner
  • Nikiforakis, Nikos
  • Normann, Hans-Theo

Abstract

This paper analyses vertical cross-shareholding, that is, the mutual holding of a minority of shares between vertically related firms. We investigate the conditions under which cross-shareholding improves efficiency. First, we explore the issue in a game-theoretic model and find that cross-shareholding is sufficient to obtain the first-best solution. We then proceed by testing these predictions experimentally. Our findings are that the theory predicts the sellers' decisions accurately and to some extent the price of the buyers. Cross-shareholding appears to occur more frequently than predicted and it enhances efficiency even where not predicted.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 25 (2007)
Issue (Month): 1 (February)
Pages: 69-89

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Handle: RePEc:eee:indorg:v:25:y:2007:i:1:p:69-89

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
  2. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
  3. Malueg, David A., 1992. "Collusive behavior and partial ownership of rivals," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 27-34, March.
  4. Rick Harbaugh, 2001. "Equity Stakes and Hold-up Problems," Claremont Colleges Working Papers 2001-31, Claremont Colleges.
  5. Flath, David, 1989. "Vertical integration by means of shareholding interlocks," International Journal of Industrial Organization, Elsevier, vol. 7(3), pages 369-380.
  6. Guido Pepermans & Bert Willems, 2005. "The Potential Impact of Cross-Ownership in Transmission: an Application to the Belgian Electricity Market," Center for Economic Studies - Discussion papers ces0503, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  7. Reitman, David, 1994. "Partial Ownership Arrangements and the Potential for Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 313-22, September.
  8. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
  9. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
  10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  11. Martin, Stephen & Normann, Hans-Theo & Snyder, Christopher M, 2001. "Vertical Foreclosure in Experimental Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 466-96, Autumn.
  12. Durham, Yvonne, 2000. "An experimental examination of double marginalization and vertical relationships," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 207-229, June.
  13. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  14. Dietzenbacher, Erik & Smid, Bert & Volkerink, Bjorn, 2000. "Horizontal integration in the Dutch financial sector," International Journal of Industrial Organization, Elsevier, vol. 18(8), pages 1223-1242, December.
  15. Reynolds, Robert J. & Snapp, Bruce R., 1986. "The competitive effects of partial equity interests and joint ventures," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 141-153, June.
  16. Flath, David, 1991. "When is it rational for firms to acquire silent interests in rivals?," International Journal of Industrial Organization, Elsevier, vol. 9(4), pages 573-583, December.
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Cited by:
  1. Hunold, Matthias & Röller, Lars-Hendrik & Stahl, Konrad O, 2012. "Backwards Integration and Strategic Delegation," CEPR Discussion Papers 8910, C.E.P.R. Discussion Papers.
  2. M. Vittoria Levati & Matteo Ploner & Werner Güth, 2005. "The impact of payoff interdependence on trust and trustworthiness," Papers on Strategic Interaction 2005-19, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Werner Güth & Manfred Stadler, 2007. "Path dependence without denying deliberation— a continuous transition model connecting teleology and evolution," Journal of Evolutionary Economics, Springer, vol. 17(1), pages 45-52, February.

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