Skip to main content

Ownership, competition, innovation, and antitrust

Periodic Reporting for period 2 - OCIAN (Ownership, competition, innovation, and antitrust)

Reporting period: 2020-01-01 to 2021-06-30

The aim of the project is to study the effect of the ownership structure of firms on competition in product markets, innovation, and macroeconomic outcomes, and derive welfare and policy implications. The rise of institutional investment, together with the profound changes occurred in the asset management industry in the last decades, has implied important modifications in the ownership structure of firms. Among them, there has been a remarkable increase in patterns of common ownership of firms in the same industry. This increase has raised antitrust concerns, mostly in the US but also in the EU. At the same time, there is there is evidence of a lack of dynamism in terms of entry and exit, investment and innovation, which several commentators and researchers link to the potential secular stagnation of advanced economies, and blame on the rise of market power. The research in a first phase develops theoretical models to study the effects of changes in the investment industry and firms’ ownership patterns on product markets and the general equilibrium macroeconomic consequences. In a second phase some empirical validation is sought.
There is public concern about the increase in market power and the impact of changes in the ownership structure of firms in developed economies. Indeed, there is debate on whether these factors are contributing or causing a perceived secular stagnation of developed economies.
The proposal consists of five strands. The first three purport to study the effect of changes of the market structure of the investment industry and ownership structure of firms on: i) market power in product markets; ii) investment and innovation incentives in the presence of technological spillovers among firms; and iii) aggregate output, investment, labour supply and income distribution. Those strands are quite advanced and have generated several important results. In strands i) and iii) a tractable general equilibrium model of oligopoly has been developed which explains how an increase in effective concentration in the market (which accounts for the increase in common ownership) yields lower real wages, employment and a depressed economy. Furthermore, it is shown how intra-industry common ownership has a depressing effect on the economy while economy-wide common ownership (diversification) may be pro-competitive. In strand ii) it has been established that common ownership may help internalize technological spillovers in an industry and how higher levels of common ownership may be allowed in less concentrated markets.
The results described in item (iii) above make substantial progress beyond the state of the art since they provide a tractable model of general equilibrium in oligopoly, hitherto non-existent, and therefore with potential wide application to macroeconomics and international trade. Furthermore, the models developed integrate ownership structure with oligopoly theory and allow to gauge the impact of changes in the former in firm competition and incentives to innovate.
The fourth strand of the project aims to develop empirical assessments and calibration of the theory with US data. The expected result will explain the internalization of profits of other firms by the manager of a firm manager with the ownership structure of the firm, and link directly firms’ margins with the former. The final strand of the proposal aims to derive antitrust and regulatory implications of the results. Here the expectation is that results will be forthcoming on the impact of common ownership on the labour market, modifying the Keynesian job market multiplier in an oligopoly context, on market structure when there is free entry, and when there are asymmetric firms competing in the market. This will allow to develop implications for labour market policy, structural regulation, and merger policy.