Implications Of Cross-holdings On Firms’ Competitive Behavior

As t.he main body of microeconomic activities,firms’ behavior have important im-pacts on social and economic aspects.The government work report of 2016 puts forward that the government will promote both the reform of state-owned firms and the diversifi-cation of equity reform in the next two years.At the beginning of 2017,Mr.Xiao Yaqing,director of the State-owned Assets Supervision and Administration,proposed that we should practice the reform of the corporations,the joint-stock systems and the mixed ownership systems,explore the diversification of the equity reforms,complete the system reforms of the state-owned firms,support the cross-holdings of the central firms and the cross-holdings between the central firms and local state-owned firms,and promote the restructuring and listing work vigorously.Furthermore,Xiao Yaqing pointed out that we should encourage firms in the same industry to explore cross-holdings actively,to form strategic alliances and to achieve mutual benefits and win-win situations.In the 1990s,some scholars pointed out,that cross-holdings are one of the most effec-tive ways to diversify state-owned firms’ ownership structure.The Chinese government should encourage companies with poor operating conditions to hold shares of companies with better conditions,so as to increase competitiveness through reorganization.Cross-holdings are beneficial for firms to optimize industrial structure,strengthen the strategic coordination,promote business-oriented deeper cooperation,and make firms comple-ment with each other to achieve diversification at the industrial level.Cross-holdings are gradually becoming a new path for the reform of state-owned firms.Firms can form a tight relationship with each other through cross-holdings,allowing them to establish a community of interests.And this kind of relationship strengthens the communication of firms in competition,research,development,production and other aspects correspondingly,which makes these firms pay more attention to common long-term interests and strategic coordination.This will have important impacts on the firms’economic behavior.Based on the knowledge of game theory and industrial organization theory,this paper establishes theoretical models both in homogeneous product oligopoly market and heterogeneous product oligopoly market.We mainly focus on the formation and stability of the cross-holdings structure and its impacts on firms’ quantity competition,entry deterrence and technology innovation,which provides some new theoretical basis for reforming state-owned firms to improve their efficiency.Meanwhile,it also provides some new theoretical basis for empirical research.This paper analyzes the impacts of cross-holdings on firms’ quantity competition,entry deterrence and technology innovation.The paper is organized as follows.The first chapter is an introduction.In this chapter,we introduce the research background,the research objectives and methods,the main conclusions and major in-novations and some deficiencies.The second chapter is the literature review.According to the research contents of this paper,we make a brief review about historical literatures on cross-holdings,entry deterrence and technology innovation.Furthermore,we elaborate the differences and innovations between this paper and traditional conclusions.The third chapter focuses on the analysis of the impacts of cross-holdings on firms’quantity competition.This chapter is divided into four parts.Firstly,we introduce the formulation of the firms’ profits when considering cross-holdings.Secondly,we study the effects of cross-holdings on firms’ quantity competition and social welfare based on the"Radiation Type" cross-holdings in homogeneous oligopoly market.Thirdly,we analyze which firm should the acquiring firm choose to hold passive ownership in and what is the optimal amount of ownership.At last,we study the impacts of cross-holdings in heterogeneous product duopoly market.The fourth chapter focuses on the analysis of the impacts of cross-holdings on entry deterrence.In this chapter,we examine whether cross-holdings can be used as a strategic device for an incumbent to deter the entry of potential entrant in the market.We further compare the effectiveness of this entry deterrence approach with some traditional methods.The fifth chapter focuses on the analysis of the impacts of cross-holdings on tech-nology innovation.In this chapter,we firstly compare the equilibrium of tcclnology innovation when considering cross-holdings in a two-stage differentiated duopoly game.Then,we study the impacts of competitive mode on firms’ endogenous technology in-novation.Firms choose technologies from a continuous technology set in stage one,and engage in either Cournot or Bertrand competition in stage two.Under this case,we then compare the results of technology innovation of Cournot and Bertrand competition,and analyze its impacts on firms’ profits and social welfare,respectively.The sixth chapter presents conclusions and Research Prospects.In this chapter,we summarize the main conclusions of this paper about cross-holdings and its implications to firms’ quantity competition,entry deterrence and technology innovation.Based on our results,we further come up with some open questions and leave these extensions for future research.Next,we show the main results of this paper.In the study of the impacts of cross-holdings on firms’ quantity competition,we ob-tain the following conclusions.Firstly,under the framework of "radiation type" of cross-holdings,the total output in Cournot equilibrium decreases as cross-holdings increase,which implies that market becomes more concentrated.Furthermore,we demonstrate that the acquiring firm will reduce its outputs,while all other firms increase their out-puts.We then show that the operating earning of the acquiring firm decreases but the operating earning of other firms increase.Secondly,we establish necessary and sufficient conditions when the total profit of cross-holdings firms and social welfare increase with the increasement of shares,respectively.We further study the intersection of the two conditions.Thirdly,we find out that the acquiring firm will never buy stocks from rival firms with higher marginal costs.Realizing the profitability to form cross-holdings,the acquiring firm will always choose the most efficient rival firm and determine the optimal amount of ownership endogenously.At last,we show the significant influences of product(differentiation and cross-holdings on social welfare.In the study of the impacts of cross-holdings on entry deterrence,we obtain the fol-lowing conclusions.Firstly,we illustrate that the incumbent will choose strictly positive cross-holdings in each other to keep out of the potential entrant in the equilibrium.Sec-ondly,we show that cross-holdings can be seen as a more effectiveness entry deterrence technique compared with some traditional methods in some situations.In the study of the impacts of cross-holdings on technology innovation,we obtain the following conclusions.Firstly,it is proved that the cross-holdings will make firms form asymmetric technology innovation structure,and reduce their incentives to take technology innovation.Secondly,we obtain the equilibrium technology innovations under both Cournot and Bertrand competition,and we further show that Cournot competition induces a greater incentives to take technology innovation for both firms.Furthermore,we compare the equilibrium outputs and prices under these two competition modes and point out that Bertrand competition will always yields higher consumer surplus and social welfare than Cournot competition.The policy implications of this thesis are as follows.Cross-holdings does lead to a reduction in competitive behavior among firms,where the output declines and the price increases with the increasement of shares in the general case.However,as long as the government is fully aware of the impacts of the cross-holdings on the firms’ competitive behavior from the "micro" point of view,and "set" ownership structure between firms in advance,it can surly enable cross-holdings firms maximize their own profits and increase social welfare at the same time.When the government provide guidance for firms to hold shares in each other,it should pay attention to the market structure,especially the market shares and the distinction between alternative firms and complementary business.On the other hand,notice that cross-holdings can be seen as a very efficient way of strategic entry deterrence,the incumbent can avoid unnecessary malicious competition and sustain its market power through cross-holdings.At the same time,our paper shows that cross-holdings will decrease the incentives of technology innovation,which is not compatible with the current advocation to encourage the innovation of firms.The relevant policy makers should pay a close attention to the above arguments.