Vertical shareholding, vertical product differentiation and social welfare

A vertically related market with vertical product differentiation is used to analyze the impact of vertical cross-ownership on industry profit, consumer surplus and social welfare. With forward cross-ownership, we find that when the upstream firm holds the share of the low-quality downstream firm, the industry profit is increasing (decreasing) in the cross-ownership if the product quality difference is large (small). When the upstream firm holds the share of the high-quality downstream firm, the industry profit is increasing in the cross-ownership. The cross-ownership will lead to a higher consumer surplus and social welfare no matter the type of vertical cross-ownership. We also consider the scenario that the upstream firm holds the share of both downstream firms.