IFin Seminar, Bruno Pellegrino, University of Maryland "A Tale of Two Networks: Common Ownership and Product Market Rivalry"
Institute of Finance
Date: 18 January 2022 / 12:25 - 13:40
Speaker: IFin Seminar, Bruno Pellegrino, University of Maryland
Title: "A Tale of Two Networks: Common Ownership and Product Market Rivalry"
Time: 12:25 - 13:40
Room: Virtual on Zoom
We study the welfare implications of the rise of common ownership and product market concentration in the United States from 1994 to 2018. We develop a general equilibrium model with a hedonic demand system in which firms compete in a network game of oligopoly. Firms are connected through two large networks: the first reflects ownership overlap, the second product market rivalry. In our model, common ownership of competing firms induces unilateral incentives to soften competition. The magnitude of the common ownership effect depends on how much the two networks overlap. We estimate our model for the universe of U.S. public corporations using a combination of firm financials, investor holdings, and text-based product similarity data. We perform counterfactual calculations to evaluate how the efficiency and the distributional impact of common ownership have evolved over time. According to our baseline estimates the welfare cost of common ownership, measured as the ratio of deadweight loss to total surplus, has increased nearly tenfold (from 0.3% to over 4%) between 1994 and 2018. Under alternative governance assumptions the deadweight loss in 2018 ranges between 1.9% and 4.4% of total surplus. The rise of common ownership has also resulted in a significant reallocation of surplus from consumers to producers.