Overlapping Ownership, R&D Spillovers, and Antitrust Policy

In many industries, overlapping ownership arrangements (OOAs) are prevalent in the form of cross-shareholding agreements among firms or common ownership by investment funds. The latter in particular has grown tremendously in the last three decades and with investors holding significant stakes in the same industry. The tendency of such OOAs to reduce price competition has raised antitrust concerns. There is also a related debate about whether and why innovative activity and business dynamism have abated recently (e.g., as explained in documents by the US Council of Economic Advisors and Obama's executive order to promote competition) pointing at increased market power as the culprit.

To what extent, and by what means, should antitrust authorities limit the "partial" mergers that result from overlapping ownership in innovative industries? In this paper we provide a welfare analysis of OOAs in the presence of spillovers and derive some implications for competition policy. While OOAs lessen competitive pressure, they may have a beneficial effect on investment provided there are positive spillovers across firms. The reason is that OOAs help to internalize the spillover externality, which is especially important for highly innovative industries. Indeed, empirical estimates find that gross social returns to R&D are at least twice as high as the private returns.

This paper stipulates precise conditions that can be checked to see – in industries with significant R&D spillovers – whether overlapping ownership is (or is not) improving social welfare. Our results have antitrust implications.

To start with, conditions under which overlapping ownership improves welfare by fostering R&D are restrictive since positive welfare effects of OAAs need an industry with a high level of spillovers and not too concentrated. The conditions are typically even more restrictive under a consumer surplus standard. This fact may lead to a potential tension for competition policy since authorities adhere to a consumer surplus standard while they allow high degrees of OOAs and R&D cooperation.

Antitrust scrutiny of OOAs should increase in industries with high concentration since the spillover thresholds below which OOAs are welfare-decreasing are increasing in market concentration and with low levels of spillovers (typically industries with low levels of R&D or, alternatively, with tight patent protection). In contrast, more OOAs can be allowed when R&D has commitment value and spillovers are high (since then incentives to underinvest are very high).

Finally, the scrutiny of horizontal shareholdings should distinguish according to their type. This is so because the same extent of shareholding will lead to different degrees of internalization of rivals' profits. If the regulator wants to establish a cap on the degree of internalization of rivals’ profits by a firm this will imply a stricter cap on shareholdings involving a higher degree of control (for example, control in proportion to cash flow rights versus silent financial interests, or those which involve cross-shareholdings among firms).