1. Active ownership relations in oligopoly
Frode Skjeret,
Institute for Research in Economics and Business Administration

2. Introduction
Partial ownership relations

3. Introduction Partial ownership relations Passive Ownership Relations
Cases where control is kept in partially acquired firm
Both empirically and theoretically analysed

4. Introduction Partial ownership relations Passive Ownership Relations
Cases where control is kept in partially acquired firm
Both empirically and theoretically analysed
Active Ownership Relations
Cases where control is transferred
Less analysed in the literature

5. Introduction (contd.) Competition Policy: ‘Merger Equivalent Approach’
Passive Ownership relation: No action
Active Ownership relation: Regarded as monopoly

6. Introduction (contd.) Competition Policy: ‘Merger Equivalent Approach’
Passive Ownership relation: No action
Active Ownership relation: Regarded as monopoly
Critique of the first
Firms have incentives to reduce output
Outside firms do not fully counteract

7. Introduction (contd.) Competition Policy: ‘Merger Equivalent Approach’
Passive Ownership relation: No action
Active Ownership relation: Regarded as monopoly
Critique of the first
Firms have incentives to reduce output
Outside firms do not fully counteract
Critique of the second (current paper)
Controlling firm may reduce overall output

8. Theory Traditional Cournot (duopoly model)
2 firms and 2 identical plants

9. Theory Traditional Cournot (duopoly model)
2 firms and 2 identical plants
Each firm owns 1 plant each 100 %

10. Theory Traditional Cournot (duopoly model)
2 firms and 2 identical plants
Each firm owns 1 plant each 100 %
Firm 1 purchases a share in firm 2

11. Theory Traditional Cournot (duopoly model)
2 firms and 2 identical plants
Each firm owns 1 plant each 100 %
Firm 1 purchases a share in firm 2
Profit Maximising firms

12. Theory Traditional Cournot (duopoly model)
2 firms and 2 identical plants
Each firm owns 1 plant each 100 %
Firm 1 purchases a share in firm 2
Profit Maximising firms
Demand has the general properties

13. Theory Traditional Cournot (duopoly model)
2 firms and 2 identical plants
Each firm owns 1 plant each 100 %
Firm 1 purchases a share in firm 2
Profit Maximising firms
Demand has the general properties
Costs are assumed convex

14. Tunnelling Controlling firm
May have incentives to reduce output in partially held plant
Increase in price cet par

15. Tunnelling Controlling firm
May have incentives to reduce output in partially held plant
Increase in price cet par
May therefore also have incentives to increase production in fully owned plant
Controlling firm extracts profits in excess of what its ownership share warrants
Exchanges € for €1

16. Welfare loss Controlling firm acts as multiplant monopolist
Reduced output from plant 2

17. Welfare loss Controlling firm acts as multiplant monopolist
Reduced output from plant 2
Increase in prices gives incentives to ramp up production in plant 1

18. Welfare loss Controlling firm acts as multiplant monopolist
Reduced output from plant 2
Increase in prices gives incentives to ramp up production in plant 1
Convex costs lead to lower increase in production from plant 1 than fall in plant 2

19. Welfare loss Controlling firm acts as multiplant monopolist
Reduced output from plant 2
Increase in prices gives incentives to ramp up production in plant 1
Convex costs lead to lower increase in production from plant 1 than fall in plant 2
Consumer surplus falls

20. Welfare loss Controlling firm acts as multiplant monopolist
Reduced output from plant 2
Increase in prices gives incentives to ramp up production in plant 1
Convex costs lead to lower increase in production from plant 1 than fall in plant 2
Consumer surplus falls
Producer surplus falls

21. Graphical illustration (duopoly)
Quantities

22. Graphical illustration (duopoly)
Quantities

23. Graphical illustration (duopoly)
Quantities

24. Graphical illustration (duopoly)
Quantities
Profits

25. Graphical illustration (duopoly)
Quantities
Profits

26. Graphical illustration (duopoly)
Quantities
Profits

27. Conclusion
Controlling firm may tunnel resources
Which implies a non-cost efficient production plan
Price rises above monopoly level
Competition authorities understate societal cost from active ownership relations when using the ‘Merger Equivalent’ framework