Overlapping Ownership, R&D Spillovers and Antitrust Policy

51 Pages·2017·0.42 MB·English

Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
Overlapping Ownership, R&D Spillovers and
Antitrust Policy
`ngel L. L(cid:243)pez1 Xavier Vives2
1UniversitatAut(cid:242)nomadeBarcelona
2IESEBusinessSchool
June 2017
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
Introduction
Overlapping ownership arrangements (OOAs) are prevalent in the
form of cross-shareholding agreements among (cid:133)rms or common
ownership by investment funds:
Minority shareholdings are widespread in many industries (e.g.
automobiles, airlines, (cid:133)nancial, energy, steel sectors).
Common ownership has grown tremendously in the last three
decades, with proportion of US public (cid:133)rms where investors hold
large stakes in the same industry going from under 10% in 1980 to
60% in 2010.
Preliminary evidence of OOAs reducing price competition in the
airline and banking industries has raised antitrust concerns.
There is also a debate about whether and why innovative activity
and business dynamism have abated recently (CEA (2016), Obama(cid:146)s
executive order to promote competition).
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Questions and objectives
The paper analyzes the interaction of OOAs and R&D activity in the
presence of technological spillovers and derives testable predictions
and antitrust implications from an oligopoly model.
OOAs lessen competitive pressure but may have a bene(cid:133)cial e⁄ect
on investment provided there are positive spillovers across (cid:133)rms.
OOAs help to internalize the spillover externality, especially
important for highly innovative industries.
Should antitrust authorities limit the (cid:147)partial(cid:148)mergers that result
from OOAs in innovative industries?
The analysis may help elucidate whether the documented increase in
OOAs has outrun its social value.
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Approach
We consider a general symmetric model of cost-reducing R&D
investments with spillovers in Cournot oligopoly (which subsumes
received R&D literature) and with overlapping ownership:
which includes both Silent Financial Interests or Passive Invesments
and Control Interests (as in Salop and O(cid:146)Brien (2000)) as well as
distinguishing between stock acquisitions made by investors and
those made by (cid:133)rms.
In our central scenario (cid:133)rms make simultaneously their R&D and
output decisions.
Approach aids tractability while helping to capture the imperfect
observability of (cid:133)rms(cid:146)R&D investment levels (Cohen (1995),
Griliches (1995)).
We test the robustness of the results in a two-stage competition
model and to Bertrand competition with product di⁄erentiation.
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Questions
How do R&D and output levels vary with overlapping ownership
interests?
What are the key determinants of the socially optimal degree of
overlapping onwership?
How does it depend on structural parameters (such as demand and
cost conditions, industry technological opportunity, and level of
spillovers)?
How does it depend on the objective of the competition authority (to
maximize TS or rather CS)?
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Positive results (I)
We show that OOAs may increase TS, and even CS, in industries
where investment in R&D is important and spillover e⁄ects are
su¢ ciently high.
For demand not too convex, increases in overlapping ownership
increase (decrease) R&D and output for high (low) enough spillovers
while it increases R&D but decreases output for intermediate levels
of spillovers.
The two thresholds that partition the regions for spillovers are
increasing in the level of market concentration.
We derive testable predictions:
a positive relationship between overlapping ownership and R&D
should be found in industries with high enough spillovers, low enough
concentration and demand not too convex;
the positive association should extend to output in industries with
high e⁄ectiveness of R&D.
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Normative results (II)
The range of spillovers is typically partitioned in three regions with,
respectively, optimally:
no overlapping ownership for low levels of spillovers;
positive overlapping ownership for the TS and CS standards for high
levels; and
positive overlapping ownership for the TS standard only in an
intermediate region.
Optimal overlapping ownership is increasing in extent of spillovers.
We (cid:133)nd conditions for a cartelized Research Joint Venture (RJV) to
be optimal.
The CS standard is always more stringent than the TS standard.
The TS socially optimal degree of overlapping ownership increases
with the number of (cid:133)rms, the elasticity of demand and of the
innovation function, and the intensity of spillover e⁄ects.
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Antitrustconcerns on OOAs
There is growing interest in assessing competitive e⁄ects of OOAs:
Rapid growth of common ownership with stakes in competing (cid:133)rms.
Some notorious cross-ownership cases cases:
Ryanair(cid:146)s acquisition ofAerLingus(cid:146)s stock.
Northwestpurchase of14% ofthe common stock ofContinental.
In the US OOAs examined under Clayton Act (S. 7) and
Hart-Scott-Rodino Act:
Institutional investors can hold up to 15% without need to notify to
the antitrust authority.
OOAs can be challenged if they substantially lessen competition.
Proposals on how to dealwith OOAs: Elhauge (2016), Baker(2016),
Posner et al. (2016)).
The European Commission proposes to extend the scope of the
Merger Regulation to be able to intervene in OOAs cases.
Innovation is a central focus for antitrust policy and merger control:
In 2008-14, 36% of DOJ/FTC challenged mergers were identi(cid:133)ed to
harm innovation; 76% in high R&D intensity industries.
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Literature: e⁄ects ofoverlapping ownership
Reynolds and Snapp (1986), Bresnahan and Salop (1986):
non-controlling minority shareholdings result in less output/higher
prices (even if equity interests are small).
Farrell and Shapiro (1990) show that passive (cid:133)nancial stakes may be
welfare increasing in asymmetric oligopolies.
Evidence on anticompetitive e⁄ects of OOAs:
Azar et al. (2015) (cid:133)nd that airline ticket prices in the US are about
10% higher on the average route than would be with no partial
ownership interests. Similar results for banking (Azar et al. (2016)).
GutiØrrez and Philippon (2016) (cid:133)nd that underinvestment in the US
since the 2000s is driven by (cid:133)rms owned by quasi-indexers and in
industries with more concentration/common ownership.
Evidence of e¢ ciency gains:
He and Huang (2017): Through common ownership US public (cid:133)rms
increase their market share (1980-2010), improve innovation
productivity(patentsper$spendinR&D)andoperatingpro(cid:133)tability.
Evidence of transmission mechanism:
Anton et al. (2016): industries with more common ownership have
less relative performance manager compensation.
Introduction FrameworkandEquilibrium WelfareAnalysis TheTwo-StageModel ConcludingRemarks Bertrandcompetitionwithproductdi⁄erentiation
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Literature: R&D and spillovers
Very extense literature on the e⁄ects of cooperation in R&D with
spillovers(BranderandSpencer(1984), Spence(1984), Katz(1986),
d(cid:146)Aspremont and Jacquemin (1988), Leahy and Neary (1997)).
A main objective of this literature is to examine potential
underprovision of R&D and the welfare e⁄ects of moving from a
non-cooperative to a cooperative regime in R&D:
Result (Leahy and Neary (1997)): when spillovers are positive, R&D
cooperation leads to more output, innovation, and welfare.
Bloom et al. (2013), with panel of U.S. (cid:133)rms from 1981-2001, (cid:133)nd
that:
technology spillovers are present in all sectors but with greater
importance in high-tech industries such as computers,
pharmaceuticals, and telecommunications, and that
the socially optimal level of R&D is between two and three times as
high as the level of observed R&D.
Negative relationship found between spillovers and patent protection
levels in a range of industries (Griliches 1990, Galasso and
Schankerman (2015)).