Welfare improving common ownership in successive oligopolies: The role of the input market

Abstract

This study investigates the welfare consequences of common ownership in a successive vertical oligopoly, in which upstream firms produce a homogeneous input and compete in quantities, while downstream firms produce differentiated final products and compete either in quantities or prices. Common ownership in both markets internalizes a negative horizontal externality and a positive vertical externality. The interaction between these externalities shapes market outcomes. Our main results are summarized as follows. If the downstream market is monopolized, common ownership always improves welfare. However, if the upstream market is monopolized, common ownership benefits welfare under Bertrand competition but harms it under Cournot competition when the downstream market is competitive. Further, greater upstream competition weakens the pro-competitive effect. Under Bertrand (Cournot) competition, common ownership harms welfare unless the upstream is (both upstream and downstream markets are) highly concentrated. These results suggest that whether common ownership benefits consumers and social welfare is crucially dependent on the competitiveness of upstream and downstream markets and the competition mode in the downstream market.