Ownership and Control in a Competitive Industry

In many markets, firms are interlocked by the fact that either firms own shares of each other, or investors own shares of several competitors in the very same market. In this context, partial ownership is the rule rather than the exception. Yet little research exists about acquisition incentives and their allocation consequences. Within a theoretical model, we study the effects of such partial ownership. It may be passive, i.e. only absorbing profit shares, or controlling. Yet both forms of lateral links have a bearing on allocation decisions, and in turn, on the incentives to acquire such partial non-controlling or controlling ownership. In our setup involving a duopoly in differentiated products, one expects that in a situation in which no policy controls are exercised, an investor holding controlling shares in one of the firms desires to acquire full ownership in both firms in order to exercise full monopoly power, an allocation that would maximize industry profits. We show that in almost all of the circumstances we consider, this is not the case. Much to our surprise, the investor controlling one of the two firms may not even be interested in obtaining control over the competing firm! In fact, much of the acquisition decision taken by our investor are influenced by the ownership structure of the firm controlled by her, as well as the firm she is interested to acquire shares in. For instance, if that firm is owned by very small shareholders that individually cannot exercise control, the typical shareholder will wait for the allocation to be implemented, that maximizes the value of her stake, and then cash in. This immediately implies that the investor cannot obtain rents from the shares acquired, but only from an increasing value of the shares already in her possession. By contrast, if, for instance, the target firm is owned by one controlling investor, the buyer can acquire shares by compensating that investor for his current profits: Any profit increasing acquisition, and resulting allocation decisions lead to the absorption of rents by the acquirer. All of this has deep implications on the emerging equilibrium pattern of acquisitions and resulting allocation decisions, that leads to a number of empirically testable hypotheses, and to recommendations for competition policy yet to be developed in an ensuing formal analysis.

Karle, Heiko, Tobias J. Klein and Konrad Stahl (2011), Ownership and Control in a Competitive Industry, ZEW Discussion Paper No. 11-071, Mannheim.