Vertical shareholding, vertical product differentiation and social welfare

Abstract

AbstractA vertically related market with vertical product differentiation is used to analyze the impact of vertical cross‐ownership on industry profit, consumer surplus and social welfare. With forward cross‐ownership, we find that when the upstream firm holds the share of the low‐quality downstream firm, the industry profit is increasing (decreasing) in the cross‐ownership if the product quality difference is large (small). When the upstream firm holds the share of the high‐quality downstream firm, the industry profit is increasing in the cross‐ownership. The cross‐ownership will lead to a higher consumer surplus and social welfare no matter the type of vertical cross‐ownership. We also consider the scenario that the upstream firm holds the share of both downstream firms.