We examine the effects that passive investments in rival firms have on the incentives of firms to engage in tacit collusion. In general, these incentives depend in a complex way on the entire partial cross ownership (PCO) structure in the industry. We establish necessary and sufficient conditions for PCO arrangements to facilitate tacit collusion and also examine how tacit collusion is affected when firms' controllers make direct passive investments in rival firms.

We examine the effects that passive investments in rival firms have on the incentives of firms to engage in tacit collusion. In general, these incentives depend in a complex way on the entire partial cross ownership (PCO) structure in the industry. We establish necessary and sufficient conditions for PCO arrangements to facilitate tacit collusion and also examine how tacit collusion is affected when firms' controllers make direct passive investments in rival firms. While horizontal mergers are subject to substantial antitrust scrutiny and are often opposed by antitrust authorities, passive investments in rivals were either granted a de facto exemption from antitrust liability or have gone unchallenged by antitrust agencies in recent cases (Gilo, 2000). This lenient approach toward passive investment in rivals stems from the courts' interpretation of the exemption for stock acquisitions "solely for investment" included in Section 7 of the Clayton Act.In this article we wish to examine whether this lenient approach of courts and antitrust agencies toward passive investments in rivals is justified. Like other horizontal practices (e.g., horizontal mergers), (passive) partial cross ownership (PCO) arrangements raise two main antitrust concerns: concerns about unilateral competitive effects and concerns about coordinated competitive effects. We focus on the latter and study the effect of PCO on the ability of firms to engage in tacit collusion. To this end, we consider an infinitely repeated Bertrand oligopoly model in which firms and/or their controllers acquire some of their rivals' (nonvoting) shares. This setting allows us to deal with the complexity generated by the chain effects of multilateral PCO. This complexity arises since, in general, the profit of each firm, both under collusion as well as under deviation from collusion, depends on the whole set of PCO in the industry and not only on the firm's own stake in rivals. Another advantage of this model is that PCO does not affect the equilibrium in the one-shot case. Consequently, the competitive effect of PCO comes only from its effect on the incentive of firms to engage in tacit collusion. We say that PCO arrangements facilitate tacit collusion if they expand the range of discount factors for which tacit collusion can be sustained.It might be thought that since PCO allows firms to internalize part of the harm they impose on rivals when deviating from a collusive scheme, any increase in the level of PCO in the industry will necessarily facilitate tacit collusion. This intuition, however, ignores the fact that PCO arrangements create an infinite recursion between the profits of firms that hold each other's shares, both under collusion and following a deviation from collusion. Consequently, PCO arrangements affect the incentive of each firm to collude in a complex and subtle way.Despite this complexity, we are able to prove that an increase in the stake of firm r in a rival firm s never hinders collusion. Moreover, we show that such an increase will surely facil...

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We study the incentive to acquire a partial stake in a vertically related firm and then foreclose rivals. We show that whether such partial acquisitions are profitable depends crucially on the initial ownership structure of the target firm and on corporate governance. (JEL D21, D43, G34, L13, L22)

We characterize collusion involving secret vertical contracts between retailers and their supplier—who are all equally patient (“vertical collusion”). We show such collusion is easier to sustain than collusion among retailers. Furthermore, vertical collusion can solve the supplier's inability to commit to charging the monopoly wholesale price when retailers are differentiated. The supplier pays retailers slotting allowances as a prize for adhering to the collusive scheme and rejects contract deviations. In the presence of competing suppliers, vertical collusion can be sustained using short‐term exclusive dealing.