Question

Consider two firms producing a homogeneous good and competing by setting prices each period for an infinite number of periods. Each of the two firms owns a minority share k of its rival. This share is small so that each firm keeps full control of its own activities and decisions; the rival just receives share k of the firm’s profits.

Analyse how this pattern of cross-ownership affects the likelihood of collusion through the use of trigger strategies by the two firms. Is collusion more or less likely compared to the case of no cross-ownership?

Answer 1

If we consiser no level of cross ownership or almost negligible then both firms shall try to make better off by making rival worse off and can lead to disequilibrium in prices. Hence one if firm may tend to lower prices intentionally to increase market share and thus causing losses to the rival.

Now in above case since both of them have minority stakes, both tend to obey the pre agreed prices such that the situation leads to Nash equilibrium and both firms are better off and hence make profits eventually over indefinite periods. Such subsequent profits by both firms will lead to subsequent dividend for each other and hence benefitting both in long run.