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Profit formulation and equilibrium strategy of firms with cross-shareholding

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  • Shi, Yuan
  • Wang, Xinhua
  • Gao, Hongwei

Abstract

A profit formulation of cross-shareholding among firms was presented based on feedback control principle. Constructing a two-stage game, we focused on the equilibrium strategy and market performance of two firms in Cournot duopoly with cross-shareholding. The equilibrium strategy, which consists of two firms' equilibrium equities and equilibrium outputs, was solved by backward induction. The results show that the equilibrium strategy under cross-shareholding always increases each firm's profit, so as to realize a win-win situation between two rivals, no matter the products are substitutes or complements. However, in the case of substitute products, cross-shareholding reduces consumer surplus and economic welfare.

Suggested Citation

  • Shi, Yuan & Wang, Xinhua & Gao, Hongwei, 2021. "Profit formulation and equilibrium strategy of firms with cross-shareholding," Finance Research Letters, Elsevier, vol. 38(C).
    • Handle: RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319301047
    DOI: 10.1016/j.frl.2020.101435
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    References listed on IDEAS

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    More about this item

    Keywords

    Cross-shareholding; Profit formulation; Operational decision; Equilibrium strategy; Economic welfare;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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