Competitive Effects of Partial Control in an Input Supplier

Luis Cabral, Helder Vasconcelos and Duarte Brito

No 11397, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Motivated by recent competition policy cases, we study an industry where downstream firms partially own a supplier. If ownership corresponds to control, then consumer surplus is higher and possibly non-monotonic with respect to the ownership share. We provide conditions such that consumers are better off when ownership of the upstream firm is shared by the downstream firms; and when ownership is partial (i.e., less than 100%). These results are based on two effects of partial ownership: first, a vertical-control effect, which effectively reduces the extent of double marginalization; and second, a tunneling effect, whereby the downstream firms use the wholesale price as a means to transfer value from independent upstream shareholders.

Date: 2016-07
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