Partial cross ownership and tacit collusion

This paper shows how competing firms can facilitate tacit collusion by making passive investments in rivals. When firms are identical, only multilateral partial cross ownership (PCO) facilitates tacit collusion; the incentives of firms to collude in this case depend in a comlex way on the whole set of PCO in the industry. A firm's controller can facilitate tacit collusion further by investing directly in rival firms and by diluting his stake in his own firm. In the presence of cost asymmetries, even unilateral PCO of an efficient firm in a less efficient rival can facilitate tacit collusion.