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Profit formulation and equilibrium strategy of firms with cross-shareholding

Yuan Shi, Xinhua Wang and Hongwei Gao

Finance Research Letters, 2021, vol. 38, issue C

Abstract: A profit formulation of cross-shareholding among firms was presented based on feedback control principle. Constructing a two-stage game, we focused on the equilibrium strategy and market performance of two firms in Cournot duopoly with cross-shareholding. The equilibrium strategy, which consists of two firms' equilibrium equities and equilibrium outputs, was solved by backward induction. The results show that the equilibrium strategy under cross-shareholding always increases each firm's profit, so as to realize a win-win situation between two rivals, no matter the products are substitutes or complements. However, in the case of substitute products, cross-shareholding reduces consumer surplus and economic welfare.

Keywords: Cross-shareholding; Profit formulation; Operational decision; Equilibrium strategy; Economic welfare (search for similar items in EconPapers)
JEL-codes: C7 D4 L1 L2 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319301047

DOI: 10.1016/j.frl.2020.101435

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