Periodic Reporting for period 4 - OCIAN (Ownership, competition, innovation, and antitrust)
Reporting period: 2023-01-01 to 2023-06-30
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 a debate on whether these factors are contributing or causing a perceived secular stagnation of developed economies. 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 that have 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 developed in a first phase 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 the second phase, empirical validations were sought.
The project has produced five publications in top international journals and three working papers which are being revised in the publication process.
The project has produced five publications in top international journals and three working papers which are being revised in the publication process.
The proposal consisted of five strands. The first three purporting 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, labor supply and income distribution. Those strands 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 from a welfare point of view. Regarding strand (iv), the anti-competitive influence of intra-industry common ownership and the pro-competitive one of inter-industry common ownership has been tested satisfactorily in the airline industry, and the link between the diversification of investors, common ownership pricing incentives and mark ups has also been established in a cross-section of US industries. Strand (v) dealt with the antitrust implications of the results which have been incorporated in the produced papers pointing at the limitations of the classical competition policy analysis which only centers in the consequences of competition for consumer surplus.
Overall, the picture that emerges from the study is that ownership structure (be it in the form of common ownership or cross-ownership) matters for competition, innovation, and for macroeconomic performance. This has been established both theoretically and empirically. The results have been published in five top international journals and in three working papers (disseminated in international working paper series) which are being revised at present to be eventually published. The results of the project have been presented in 20 conferences, including 4 keynotes, and in seminars in 14 academic institutions. Furthermore, the results have also been disseminated in columns such as vox.eu as well as in lectures in graduate programs.
Overall, the picture that emerges from the study is that ownership structure (be it in the form of common ownership or cross-ownership) matters for competition, innovation, and for macroeconomic performance. This has been established both theoretically and empirically. The results have been published in five top international journals and in three working papers (disseminated in international working paper series) which are being revised at present to be eventually published. The results of the project have been presented in 20 conferences, including 4 keynotes, and in seminars in 14 academic institutions. Furthermore, the results have also been disseminated in columns such as vox.eu as well as in lectures in graduate programs.
All subprojects have pushed the frontier of knowledge. For example, 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. In strand (ii) 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, as stated, aimed to develop empirical assessments and calibration of the theory with US data. This was accomplished. The results explain the internalization of profits of other firms by the manager of a firm, link it with the ownership structure of the firm, and with firms’ margins. The final strand of the proposal aimed to derive antitrust and regulatory implications of the results and is embedded in the different subproducts of the project.