Competitive Effects of Partial Ownership: Financial Interest and Corporate Control

Abstract

This paper presents an economic framework for analyzing the competitive effects of partial ownership interests. The competitive effects of partial ownership depend critically on two separate and distinct elements: financial interest and corporate control. These two factors affect the incentives of the acquiring firm and the firm in which it acquires a partial ownership interest. The paper defines and analyzes a variety of different corporate control assumptions such as silent financial interest, total control, and Coasian joint control and applies the framework to horizontal and vertical joint ventures. Partial ownership forces the analyst to grapple with the question of the degree of control or influence that partial owners have over managers, how partial ownership translates into control or influence, and how this influence translates into competitive effects. The paper also develops methods for quantifying the effect of partial ownership interests and joint ventures on competitive incentives, using the modified HHI and a price pressure index (PPI) that we define.

JEL Classification: G34, L20