International Journal of Industrial Organization 4 (1986) 141-153.

North-Holland

THE COMPETITIVE EFFECTS OF PARTIAL EQUITY

INTERESTS AND JOINT VENTURES

Robert J. REYNOLDS and Bruce R, SNAPP*

ICF Incorporated, Washington, DC 20006, USA

Final version received August 1985

Antitrust authorities shot&i consider the trade-off between enhanced efficiency and reduced
competition in cases of partial ownership. This paper examines the competitive effects side of
that trade-off in the context of a modified Cournot model. We show that, in markets where
entry is diflicult, partial ownership arrangements could result in less output and higher prices
than otherwise, even if the ownership shares are relatively small. These effects arise solely
because these arrangements link the fortunes of actual or potential competitors, producing a
positive correlation among their profits. In this sense, the effects are purely structural: they arise
not because of increased opportunities for collusion or changes in the concentration of control,
but because the linking of profits reduces each firm’s incentive to compete. Since these links
internalize free rider problems associated with policing collusion and investing in entry
deterrence, however, they could also enhance cartel stability and profitability.

1. Introduction
Firms are frequently linked by partial equity interests’ and joint ventures.
As with mergers, there are a number of potential eficiencies which may
motiviate such links. For example, partial ownership offers a means for
providing (and compensating) capital to risky ventures, for solidifying buyer-
seller relationships, for funding and exploiting joint R&D activities,2 and for
appropriating the returns to technology transfer.j On the other hand, when

*This is a revised version of ‘The Economic Effects of Partial Equity Interests and Joint
Ventures’, U.S. Department of Justice Working Paper 82-3, August 1982. The authors gratefully
acknowledge the helpful comments of Robert W. Wilson, Robert McGuckin, Jon Joyce, Lucinda
Lewis, Robert T. Masson, Marius Schwartz, Steve Salop, Steve Silberman, Norm Familant, Russ
Pittman. and rwn ~-nccyz;~~ tiommentators. The views expressed are those of the authors and
do not necessarily rew ~nnn++‘I
,rX~Et&. _“a nf
-LtiYl “‘ JPC-
LG. I?-lr.r-nret?=
L”_“‘~L.‘..._.. f-l fit
-- the !J.S. EPoPm!lp!?t d JvstiCe.
“Equity interest* refers to.the ownership of any security, asset or claim for which the return is
positively related to the issuing firm’s profitability. Thus, the term may include bonds, some
kinds of leases, and other financial instruments as well as common and preferred stocks. For tb::
purposes of this paper, we shall use the term ‘partial equity interest’ to refer only to interests root
conveying control.
2Berg and Friedman (1977) conclude that the benefits from pooling research and development
efforts are an important motivation for joint ventures.
jWilson (1975) p resents information o;i the use of partial ownership as an alternative to the
licensing of technology.

0167-7187/86/$3.50 ((_>1986, Elsevier Science Publishers 13.V.(North-Holland)

142 R.J. Reynolds and B.R. Snapp, Partial equity interests,joint ventures

the firms involved are actual or potential competitors, partial ownership

arrangements may reduce competition. Moreover, as shown in this paper,
substantial competitive effects (e.g., relatively large reductions in industry
output) can occur even with relatively small ownership shares. It is thus
appropriate for antitrust authorities to examine the trade-OK between en-
hanced efficiency and reduced competition in cases of partial ownership, even
though conventional analysis has dealt primarily with acquisitions which
convey operating control.4
The focus of this paper is on the competitive effects side of the trade-off
posed by partial ownership arrangements. We find that, in markets where
entry is difficult, partial ownership arrangements could result in less output
and higher prices than otherwise. These effects arise solely because these
arrangements link the fortunes of actual or potential competitors, producing
a positive correlation among their profits. In this sense, the effects are purely
structural: they arise not because of increased opportunities for collusion or
changes in the concentration of control, but because the linking of profits
gives each firm an incentive to compete less vigorously and adopt behavior
more conducive to joint profit maximization than otherwise would be the
case.
In the next section, we analyze the effects of partial equity interests and
small joint ventures in the context of a modified Cournot model.5 We prove
that, if one or more Cournot competitors increase the level of ownership
links with rival firms, equilibrium market output will decline. In the appendix
we also derive quantitative estimates of the magnitude of the effects using a
linear model. In section 3, we examine the implications of the basic results

*When evidence of an auticomwtitive intent has been found in the United States, antitrust
authorities have challenged pariial ownership arrangements under the Sherman Act. For
example, Berge (1944) reports that the Justice Department won nolo contendere pleas in 1940
from Bausch and Lomb and Carl Zeiss, a German firm, to a complaint charging a restraint of
trade in optical instruments. One of the specific allegations was that Carl Zeiss acquired one-
fifth of Bausch and Lomb’s capital stock and representation on its board of directors in 1907 in
return for abandocing its plans to enter the United States market (pp. 144-13). The Antitrust
Division attacked a similar arrangement in 1944 charging an international restraint of trade in
matches. Included in the cited actions was an arrangement whereby the Swedish Match
Company acquired a one-third interest in the Diamond Match Company and at the same time
scrapped a partly-constructed U.S. match factory (pp. 188-189). Absent evidence of intent,
American authorities have analyzed the anticompetitive potential of partial ownership arrange-
ments by approaching them as if the firms involved wtze merging. Thus, in instances such as the
DuPont and Penn-Olin cases, pafiial equity interests conveying control and joint ventures
accounting for a large share of industry output have been challenged under the Clayton Act.
This ‘merger equivalent’ approach has necessarily led to lemcnt treatment for equity interasts too
small to convey control and for joint ventures accounting for only a small port.ion of industry
output.
‘For extensions of the results of this paper in the context of behavior that is more general
than the Cournot assumptions (but still primarily non-collusive), see Bresnahan and Salop
(1986) and Kwoka (198.5).
 R.J. Reynolds and B.R. Snapp, Partial equity interests, joint ventures 143

for cartel policing and investment in entry deterrence when firms collude. We
also consider the economic effects of ownership interests that link potential
competitors.

2. A Cournot model
Most discussions of partial acquisitions and joint ventures presume a
context of high market concentration; they assume firms recognize the
mutual interdependence of their decisions and behave accordingly.6 As such,
these discussions fail to distinguish the possibility that these links may have
economic effects in the absence of collusion. To analyze this possibility, we
start with a Cournot-type model in which firms fail to recognize the
interdependent nature of their actions with respect to output and investment
decisions.’ We assume throughout that the conditions for stable Cournot
equilibria hold globally.8
We analyze the effects of partial equity interests and joint ventures in a
single model. To do so, we make the following distinction between firms and
plants. ‘Firms’ are profit-maximizing decision-making units that own and/or
control plants. In addition to any share of profits from plants in which it has
a controlling interest, each firm may also receive profits from ownership
interests in joint venture plants it does not control and from non-controlling
equity interests in other firms. ‘Plants’ produce units of output which are
sold at the market price, the proceeds being disbursed to owning firms.
Plants are assumed to be coextensive with the physical units controlled by a
firm and may consist of several distinct physical facilities.g
These definitions implicitly assume that joint ventures operate in a specific
manner: the output of each joint venture is selected by one partner,
designated as the controller, and profits are divided according to each

‘See Brodley (1982,~~. 1530-1534). Chandler (1977) found that, in the previous century, lirms
used partial equity interests to gain access to rivals’ books to improve the enforcement of cartel
agreements (p. 317). Some railroad managers and their bankers encouraged such ties to
discourage rate cutting (pp. 173-174), although these measures were not always stable (pp. l&-
142).
‘Our colleague Bob M,AIuckin suggestf that joint ventures could inform rivals about plant
output decisions and modify each firm’s conjecture about future rival output. If so, there could
be larger output restrictions than otherwise. This effect goes beyond the scope of the present
paper but deserves further attention in the future.
sThis condition req uires that cost and demand conditions are such that firm profit funrtions
are not ‘too’ convex from below. See Rullin (1971).
’ If the proportion pf ownershi;, by the firm in the physical facilities varies, the firm has an
incentive to favor the facilities in which it has a larger proportion of ownership. Joint-venture
partners can eliminate such favoritism by contractual provisions (for example, non-
discrimination clauses or contractual minimum output) or by equalizing ownership across
facilities. We ignore this complication Iy assuming that each lirm’s marginal share will equal its
average share in the joint ventures it undertakes.
144 R.J. Reynolds and B.R. Srirp,n, Pcrtial equity intere.W, joinr t9tt:?

partner’s share of equity. Given this structure, a joint venture interest is

equivalent to an equity interest in an otherwise independent entity.”
Assume that there are n firms in a market. Firm i controls the ouiput qi of
plant i. For simplicity, assume that plants are identical with constant
marginal cost c and that all produce the same homogeneous product. Also
assume that entry is effectively blockaded. Finally, define the profits of the ith
firm, 76i,as’ 1
kfi

bochi+ T vik(P~-c)qk, (1)

where
p - market price,
c =m3ginal cost,
qi =output controlled by the ith firm,
qk =output controlled by the kth firm,
vki =tLs kth firm’s ownership interest in the ith firm or joint venture plants
contoiied by the ith firm,
vik = the ith firm’s ownership interest in the kth firm or joint venture plants
controlled by the kth firm.

Givien thus framework, suppose one or more firms decide to increase the
extent or amount of ownership interests in rivals. We can show that market
output will be a declining function of the extent to which firms are linked by
joint ventures and partial equity interests. Specifically, we can demonstrate
the following proposition:

Theorew 1. If ti and i? are alternative sets of ownership interests linking

compr:l~ors and ri> v”in the sense that rjik> ~ikfor at leabt one i and k and d = v”
otherwise, the equilibrium market output associated with ti will be less than the
equilibrium output associated with 5.

“Joint ventures structured in ways that do not require a pro i&a division of profits or output
will not produce the economic effects discussed below. Joint ventures can be structured to have
partners share overhead alone. Snbject to capacity constraints, each could determine its desired
output level independently, paying the associated variable costs. Individual participants could
even be al!dwed to expand capscity unilaterally, if they meet the associated costs. In many
instances, it may not be possibie for firms to internalize all the costs associated with such
independence, dictating the more rigid pro rata approach.
“Note that eq. (1) specifies that the managers of firm i maximize profits net of those going to
competitors. This formulation is clearly appropriate in the case of joint ventures, and it is al::,
probably approfriatc where ovvncrs hrti alsv managers. Even when ownership and management
are efkctive;,, divorced, m anagers could view sttickholdings by competiturs as somehow
cri~Trr_ent.
If managers treat all stockholders PI&C,howev~=r the L’,.~terms should be dropped from
all equatkns. This modification does not alter the nature of our results, but it reduces the
magnitude of output effect< associated with partial equity in!erests relative to those from joint
ventures. Estimates discussed in the appendix indicate that partial equity interests produce
output contractions up to one-third r;maller than joint ventures.
 R.J. Remolds and B.R. Snapa, Partial equity interests, joint oentures 145

Pr,$ Let t? represent the set of all Owners interestslinking t

an t iji be the resulting Cournot eq~i~~b~~m output decision of each firm
‘a,
I . the initial equilihti~!m, the ~tput of firm i will satisfy

where &=-~~“uik and Vk=~‘i~ki.12 Solving for qi, the equilibri

of firm ‘i’ is

The first term of (3) contains the cost and demand determinants of eatput,
and the second shcws the effects of ownership interests.13 Ownership
interests can affect the equilibrium output condition of Frm i in two ways.
First, by di!Terentiating (3) with respect to t.+&,one finds the effect of an
increase by firm i of its ownership of other firms,

a4i qk
-=-__
8Uik l- 5’
(4)

Since 4~ 1, the term is negative for 6~0 - that is, increases in its ownership
of rivals leads firm i to desire a lower output level given the output of rivals.
Second, differentiating (3) with respect to 6ki shows the effect 0x1 qi when
other firms increase their ownership interests in firm i,

a4i hi
-=
auki -(14)2 co.

If firm i has interests in rivals, then it will d&e a lower output if those
rivals increase their ownershi:: links with i:: 711otner things being equal.
Thus, if firm i increases its ownership -~*rbp=+‘itl:firm k from fiik to Zjik*firm
i will be in disequilibrium. If km k i-.&sin!k. -’ j k cOmpetitW§, it wlBl alsO
be put in disequilibrium by the larger Iink iti firm i both firms v-d find t
given the output leveis of other firms, they
the facilitks they control. Firms unaffected
react to outpui contra&xx by expanding their own pro

12The term (p-c)(dqJdqi) drops ou’. of eq. (2) because ZqJdqi=O by definition under the
Cournot conjecture.
‘jWhen there are no ownership interests to’==k’j,q, is equal to the stmdarrl Cr9urno~
equilibrium output.
146 R.J. Reynoids and B.R. Snapp, Partial equity interests, joint ventures

equilibrium, however, the total expension will be less than the contraction by
firms i and k. Because the other firms will only expand output until marginal
revenue equals marginal cost, they will never fully replace the output
c9ntraction.‘4 Thus, total market output at the new equilibrium ti would be
smaller than the outrut associated with t;. This completes the proof. l-J

Put differently, ownership interests shift the reaction functions of the firms
involved. Increase? i+- ownership interests shift the reaction functions in
toward the origin - that is, firms want lower output levels given the outputs
of other firms. The reaction functions of other firms remain unchanged.
Since ownership interests do not change the underlying cost and demand
assumptions of the model, these results should hold for any set of conditions
that produces global stability in the standard Cournot model. The magnitude
of output changes for particular firms, of course, could vary if firms were not
identical. If some firms have higher costs than others, for example, they may
produce relatively smaller portions of market output. Firms could also have
different market st.ues if products are in some way dgerentiated. An
examination of eqs. (4) and (5) suggests that ownership increases involving
big fkms should produce bigger contractions than those associated with
Fmall firms.
The effect on output over time, of course, depends critically on entry
rnnJi+innc rf ~n+rv
~“..Y.C*.z.I”.L‘ “.“‘J is quick and easy, the higher profits from reduced market
output should attract new firms and eliminate any rents. If entry is
blockaded or if it is a difftcult and lengthy process, however, the present
value of the rents generated by ownership interests could be significantly
positive.
By making assumptions about the specific form of the market demand
curve and the values of various parameters in eq. (3), one can make
quantitative assessments of the magnitude of the output effects discussed
above. As one might expect, equilibrium market output changes only
modestly when few firms are linked and the links are small. Using eq. (3),
one can show that equilibrium output would decline only 0.1 percent if one
of ten equally sized and previously unlinked firms acquired a ten percent
interest in one competitor. Were there but five firms in the market, the drop
would be 0.2 percent. Were the firm whose stock was acquired to reciprocate.
the drop in market output would be double the original.
When the links include virtually all the firms in the -market, however,
equilibrium market output may be significantly smaller than would be true if
firms were not linked. For examplati, as shawn in the appendix f:jr the case of
linear demand, if five Cournot competitors had ten percent equity interests in

14The clearest example would be if the two firms shut down altogether. The resulting
equilibrium output would ther, be that associated with two fewer tirms than before.
 R.J. Rep ! B.R. /(% ,,, Partial equity inrtwsrs. j&92: w~~rrrrs Id--

each other, equilibrium ma&e Itput would be 10.0 percent less tb_~n the
level that would occur witk _, partial ownership. Furthermore, these
interconnections close a sign& fraction of the gap between the ;r.onopoly
and standard Cournot outp~ Bn the is,stance mentioned aFJve, 25.0
percent of the gap would be closed.
The appendix also shows that hen ownership shares are at t:le maximum
level which is feasible, giver, rhe number of firms in the market, the
moncipoly output level will result regardless of the number of firms. This
phenomenon does not depend c.2 e assumptions of constant costs on linear
demand used in the appendix, ::5.can be seen by inspecting eqs. (2), (3) and
(12). Indeed, one can prove the r\;llowing propccsi;ion:

Theorem 2. If v= l/n, n idemi:d firms linked by joint venture interests will

produce the monopoly level of OUF~E irrespective of the specific value of n.
Proof Substitute vki=Vili= l/n cq. (2) to obtain

(61

which can be simplified to

““‘_p_-c+
%i
4$ i
(Wih

since qi=qk by assumption. Sr cz nqi = QT, eq. (7) is the profit-maximizing

condition for a monopolist. Th. _proof is complete. 0

In this section, we have identified certain structural effects of partial equity

interests and small joint ventures. The existence of such effects indicates that
convettGma1 calculations of concentration ratios that ignare tkzse !inks may
not adequately reflect the state of competition.15 For example, if each of ten
firms had a ten percent market share, one would calculate a four firm
concentration ratio of forty percent - not especially large. LFuppose, how:vZr,
that each aiso had a ten percent interest in each rival. According 13 Th:oreE
2, this condition could lead Coumot competitors to produce the mcno
level of output!
The same point can be made by using eq. (3) to derive the relatiollshdgP
between the price--cost margin, the dindahl index t ,l: ad the elasticity
of demand.16 Rearrange (3) so that p- c is on the left and qi 011 the right.

15A similar argument is raisec~ by Ihhesneau (1975) in the context of the oil ind,~try.
‘%ee Geroski (1983) for the derivation of this relationship.
148 R.J. Reynolds and B.R. Snapp, Partial equity interests, joint ventures

Multiply both sides by qi/Q, divide both by p, and multiply the right-hand
side by Q/Q. Rearranging the terms one gets

sf (l-‘v,+V)
s$f=-- (8)
8 1-a/, ’

where Si is the market share of firm i, 8 is the elasticity of demand times

minus one, and M =(p - c)/c, the price-cost margin. Summing over all firms,
one gets

wb.ere .V* is the HHI adjusted to reflect
there are no ownership interests, H* = H
between H, 0 and M. If vik> 0 for some i
leads one to predict a higher price--cost
than would be the case if such links were
the effects of ownership interests. If
and one has the usual relationship
and k, however, H* > H, and eq. (9)
margin for a given nominal HHI
ign0red.l’

3. Applicability to cartels and potential entrants

In a sense, increases in ownership interests produce iower market outputs
because such links ‘internalize’ a competitive ‘externality’ - namely, the
benefits each firm generates for rivals as a result of unilateral output
restrictions. Fut there are other, similar competitive externalities that these
ownership interests might also internalize and thereby increase firms profits
over time (subject, of course, to entry conditions).
Suppose, for example, that firms collude (tacitly or explicitly) to restrict
output. Because individual firms have incentives to cheat on such agreements,
the cartel will undertake v~.rious policing activities to ensure compliance.”
Because of cheating and policing, the cartel will realize lower profits than
a monqo!ist could earn. The expenditures on policing activities raise the
average costs of all firms. And since the cartel will not find it profitable to
eliminate cheating entirely, it will occur from time to time, increasing average
output and reducing overall cartel profits.
Similarly, suppose that firms colluding to restrict output can undertake
investments that deter or retard entry. ecause a given investment protects
“There are probably many ways to adjust norAnal market shares to reflect these ownership
in!erests in the sense that the calculated concentration measure rises. Since concentration
measures are inherently imperfect measures of industry performance, the results of adjubtments
to reflect the effects of ownership interec,‘; should be interpreted with great care. See Geroski
(1983) for a furthx discussion of this issue.
‘*For discussions of policing, see Porter (1983), Radner (1980), Stigler (1964) and Telser
(1972, pp. 192-206).
not only the firm that made i+ but its fellow cartel members as well, t
may be underinvestment in deterrence from the standpoint of the cartel as a
whole. As a result, there may be more entry, and thus higher output cm1
time, than if the total expenditure on deterrence were higher.
Linking rivals with small joint ventures and partial equity interests could
improve cartel performance in both areas and enhance total cartel profits, In
both instances, the source of the problem is a free rider effect, In the case of
cheating, ownership interests cause cheaters to share some of the cost
impcsed on other cartel members, thus reducing the gains to cheating. For a
given level of policing costs and cheating, an increase in ownership interests
will bring about a reduction in cheating, leading to lower average output and
higher profits than otherwise :vould be the case. Given a reduction in
cheating, the cartel will find it profitable to reduce policing expenditure to
bring the marginal benefits and costs back into equality. In the case of
investments to deter entry, higher ownership interests increase the expected
returns from any investment, thereby increasing the incentive at the margin
for firms to make additional investments.
As with the effects on output, these results do not require that all firms
increase ownership interests or that such interest link all the firms in the
cartel. In particular, a system of such interests need not include ownership by
the dominant firm or firms (if any) to be effective. Dominant firms have the
most to gain from collusive agreements and tend to adhere to the terms and
avoid cheating. It is more important to temper the incentives of smaller
firms, especially those sufficiently small that their cheating is less likely to
invite costly retaliation from larger firms. This could be accomplishes by
ownership links among the smaller firms or by partial ownership of the
dominant firms by fringe firms. Partial ownership of smaller firms by the
dominant firm, on the other hand, could actually be counter-productive if
such an involvement (however small) drew the attention of antitrust agencies.
It is interesting to note in this regard that U.S. Steel, for years the dominant
firm in the American steel industry, consciously minimized participation in
the rather extensive system of joint ventures connecting its rivals at the iron
ore production stage.ig
The results of tht basic model can also be extended to the case of links
between potential competitors. 2o Suppose there is a fnm, A, that is the only
seller in some distinct product or geographic market. Let entry into the
market be difficult, but not blockaded. Further, suppose A believes
firm I3 in a different market is the most likely and advantage
Finally, suppose A has adopted limit pricing or some other entry deterrence
.?+.-o+,Xr..r
3CrL&Ib&a ?&hi&, while costly, yields better tk,,n
LI‘.2ll a normal Feteron whEBc

“For the period immediately following World War II, tee.. FTC (1952). For more recent data,
see Financial Times (various years).
20For a more extended discussion of this case, see Wcy1101d’.
and RCWS ( 1976).
150 R.J. Reynolds and S.R. Snapp, Partial equity intere.W jnint rmtures

deterring entry by B.21 Given this situation, both A and B could profit were
B to acquire some of A’s stock or participate with A in a joint venture in the
latter’s market. Specifically, such ownership links could lead A to raise its
e (reduce investment in deterrence) without fear of entry by
‘s ability ta enter A’s market imposes a cost on A: other
earn higher profits. While B has the power to reduce these costs, it has no
incentive to do so absent an ability to share in those profits. Clearly, a
merger between A and B would remove the entry threat and permit higher
prices in A’s market. Ownership interests short of a complete merger might
also achieve the same effect. Any ownership link with A would allow B to
benefit from higher prices in A’s market. Such links would also cause B to
share in any losses its subsequent entry might impose on A. These factors
should reduce the expected profitability of entry from B’s point of view. A
would only find it profitable to raise its prices (reduce investment in entry
deterrence) if it were reasonably certain that B would not, in fact, enter.
Similarly, B would not be willirl$ tc, make the investment in the first place
unless it were reasonably certain ihat A would ‘get the message’. Again, the
nature of the links does not require expiicit discussions: conceivably, firm B
could precipitate this result unilaterally by acquiring some of A’s stock. On
the whole, the likelihood of a price increase by A, with or without explicit
communication between the fn-rns, is an increasing function of the size of B’s
ownership link to A.

Appendix: Quantitative estimates of output effects due to widespread ownership

linkages
To examine situations of widespread linkages by all firms, assume that the
market demand curve is P= u - hQ*, where Q* is total market output and Q
and b are parameters. Also, assume that firms have equal interests such that
uk,= Uik= u for all i and k and that each of n equal sized firms produces 4
units such that Q* =nq.
Substituting these values into eq. (3) gives

y2-y_--;nq)
.(1 _(n_ I)&
(4

the equilibrium output of the ith firm. Rearranging the terms gives

1 -(n- I)0 LI--I’

Y’- (A.2)
(n-1-1) -n(n- %)I1 k *

“For discussions of limit pricing, see Bain (1956), Modighani (1958). and Kamien and
SchwartL (1971). For discussion5 of other entry dete:rence stratcgics, see Schm;tlensee (!978),
Spf3lCe (i’j79J. 2nd the j~ipcn tliscuw~l hy 841xil ( IOX?)
 R.J. Reywlds and d.R. Snapp, Partiai equity interests, joint ventures 151

Assuming different values for t arameters in e . (A.2), one can calculate

the impact of different levels of joint venture and partial equity interests on
ihe level of Cournot ov +iuts for different numbers of fi s.22 The results are
reported in tables .B and A.2. Table A.1 reports the perc=ntage by which
difrerent levels of ownership interests (v) reduce market output (QV, for v>O)
below tne standard Cournot output (QT, where u=O). Table A.2 shows the
output reduction (&--QV) associated with different values of u as a
percentage of the ‘gap’ between the standard Cournot and monopoly output
levels (QT-- QM). This percentage can be interpreted as the amount by which
ownership interests close the gap.
Table A.1
Percentage reduction in standard Cournot
market output associated with di!Terent
levels of ownership interests (percent
x 1Oo).8

(QT-QvYQr
No. of
firms (n) v = 0.05 v=O.lO c=o.20

2 1.7 3.6 7.7

5 4.0 10.0 40.0
10 6.9 45.0 h

“Qy=Cournot equilibr._.m market output

in jomt venture world with specified values
of k’ and n, QY =standard Cournot equilib-
rium output with no interconnections (u = 0)
‘Value of v inconsistent with the WII-
ditions that v< l/n.

Table A.2
Reduction in the gap between the monopoly
and standard Cournout market outputs as-
sociated with digerent levels of ownership
interests (percent x 100).n
’ 52 R.J. Reynolds and B.R. Snapp, Partia! equity interests, joint ventures

When all firms are linked, even rather modest ownership interests produce
significant reduction, Q in output. For example, if five Cournot competitors
had ten gercesi equity interests in each other, equilibrium market output
would 5~ 10.0 percent less. Furthermore, these interconnections close jignil%
cant fractions of the gap between the monopdy and standard Cournot
outputs. In the instance mentioned above, 25.0 percent of the gap would be
closed.” 3
Also note that, as the value of v increases for a given value of tt, the
magnitude of the output restriction increases. Likewise, as the number of
firms increases for given values of o, the percentage reduction in output
increases. Of course, some combinations of u and n are not feasible. For
example, each of ten firms cannot have a twenty percent interest in each of
its rivals.
Substituting the maximum value of u(u= l/n) into eq. (3) and summing
over the n firms in the market, market output is

1 a-c
0 (8.3)
-‘=z b’
Thus, firms produce the monopoly output, Q,, =( I/2) ((a-c)/@, regardless of
the value of n - that is, market output is unaffected by the number of firms
when ownership interests are at the maximum level.

References
Bain, Joe, 1956, Barriers to new competition (Harvard University Press, Cambridge, MA).
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“In footnote I I, we noted [hat partial equrty interests might produce smaller output effects
uherc munqers do not distmgulsh equity interests of competitors from those of other
\lockhoider\. A\\urnlng this condition rx~\tcd in the sample urrd in the text, tc’n percent t’qui~y
Interests hnklrlg live ltrns would reduce market output 64 percent below the C’ournot market
!cccl r:lthur than 10.0 percent. Similarly, the gap between the Cournc~t and monopoly outputs
wou!tl he cltrsctl 13~ If10 pcrccnf ralhcr th:tn 250 percent. Pius, while the potential impact of
p:lrri;fl ~~IIII~ ~n~cr~*\t\ rrilg!ll IY r~~!uccd \clrncwh;ll. II c;!n s;tIIl bc tuh\t;lnllal
 R.J. Reynolds und d.R. S~uzpp,Partial equity interests. joint ventures 153

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