Testing for Competitive Effects of Common Ownership

Abstract

We propose an alternative approach for analyzing the competitive effects of common ownership: to directly analyze the weights that firms place on each others' profits rather than using measures of industry concentration (MHHI and GHHI). Analyzing weights has at least three advantages: it places fewer restrictions on the nature of competition, it requires less data to test, and it circumvents endogeneity concerns with concentration measures.We apply our approach to data from the banking industry, and our preliminary results mixed and overall rather muted. The sign of the competitive effect is sensitive to specification, and the effects we estimate are economically quite small.Firms upon which significant weight is placed -either by themselves or competitors -move very little in price or quantity distributions. PRELIMINARY -PLEASE DO NOT CITE OR DISTRIBUTE WITHOUT PERMISSIONJEL Codes:

Common Ownership and Market Entry: Evidence from Pharmaceutical Industry

“…In an empirical study, Azar et al (2017) regress airline prices on a modified Herfindahl-Hirschman index (which provides a measure of the extent of common ownership at a market level) and a set of controls, and find that airline ticket prices are 3-10% higher due to common ownership. Subsequently two papers have sought to replicate the results of Azar et al (2017), using different methodologies that are better able to account for the endogeneity of common ownership (Kennedy et al, 2017;Gramlich & Grundl, 2017). These papers directly analyze the weights that firms place on each other's profits rather than using measures of industry concentration.…”

Ultimate ownership and bank competition

“…At the same time, a structural approach has come to dominate the industrial organization literature, perhaps because cross-industry comparisons of margins as a function of HHI face severe omitted variable challenges, as emphasized by Schmalensee, Armstrong, Willig and Porter (1989). Recent preliminary working papers by Gramlich and Grundl (2017) and Gramlich and Grundl (2018) and others are motivated by similar challenges of interpretation inherent in this approach. Schmalensee, Armstrong, Willig and Porter (1989) also note, however, that "studies that compare price levels among geographically separated markets in the same industry are immune to the .…”