In many markets, we see that firms own shares in each other, or that investors own shares in multiple firms. These practices – which are called overlapping ownership arrangements (OOAs) – are found for example among airlines, banks, car producers, electric power companies, and supermarkets. Much of the policy debate and academic literature has focused on the idea that OOAs can relax competition in product markets and thereby reduce economic welfare. However, in a recent IJIO-paper entitled Overlapping ownership and input prices, Teis Lunde Lømo studies a different effect of OOAs.

The starting point of Lømo’s analysis is the observation that before firms compete in a product market, they typically buy inputs in an upstream market. For example, airlines deal with aircraft producers or leasing companies before setting ticket prices, while supermarkets buy products from manufacturers before offering them to shoppers. The research question in Lømo’s paper is then how the competitive effects of OOAs depend on such contracting with upstream suppliers.

To address this question, Lømo considers a theoretical model where a supplier sells an input to competing downstream firms. The model gives three main insights:

  • OOAs can affect input prices. If the level of overlapping ownership among the competing firms goes up, the supplier responds by raising or reducing its input price, depending on the consumer demand function. Only in special cases does the input price stay the same.
  • Changes in input prices give an indirect effect of OOAs on competition. When the input price changes, this gives a change in the competing firms’ input costs, which in turn is passed on to consumers. This indirect effect matters for the overall effect of OOAs on competition.
  • Because of the indirect effect, OOAs may be pro-competitive. If overlapping ownership reduces the input price and pass-through is very strong, an increase in overlapping ownership can give higher output, a lower product market price, and higher consumer and total welfare. This stands in contrast to the standard view that OOAs are anti-competitive.

The paper contributes to the policy debate about OOAs, which is ongoing both in the US and in Europe. First, the model illustrates that the competitive effects of OOAs in one market can depend on the actions of firms in other, vertically related markets. Second, the paper highlights the possibility that lower input prices can be an efficiency effect of OOAs.

The full paper is published in IJIO Volume 94, May 2024.