Upstream Market Structure and Downstream Cross Holding

Existing studies on cross holding usually overlook the effects of vertically related markets. Our paper, by considering different upstream market structures, highlights the importance of upstream market on downstream firms’ incentives to engage cross holding and the consequent welfare implications. In the main model, we assume there are three firms in the downstream market, two of which may engage cross holding. We find that first, the two firms will engage cross holding if the upstream market is oligopoly (triopoly or duopoly). Second, cross holding may stimulate the total production, as well as consumer welfare and social welfare. This happens when the upstream market consists of duopoly and the two firms involved in cross holding are supplied by different suppliers. Third, the common free-rider in the literature may become a victim of cross holding. More specifically, the firm that is not involved in cross holding, outsider, suffers a loss from cross holding when the upstream market is triopoly, or the upstream market is duopoly and the outsider shares the same supplier with the acquired firm. Our main results are robust to a general n-firms framework.