Product differentiation, demand expansion and the welfare effects of cross-ownership

Abstract

We show the effects of cross-ownership on product differentiation, consumer surplus and welfare under Cournot and Bertrand competition. Under Cournot competition, cross-ownership increases (decreases) product differentiation if demand expansion following product differentiation is large (small). Under Bertrand competition, cross-ownership may increase or decrease product differentiation regardless of the demand expansion effect of product differentiation. Cross-ownership may increase consumer surplus and welfare under both Cournot and Bertrand competition. Demand expansion following product differentiation and the type of product market competition play important roles for the effects of cross-ownership in an industry with endogenous product differentiation. We also show that Cournot competition may create higher consumer surplus and welfare compared with Bertrand competition.