We examine the profitability of cross-ownership in a nonrenewable resource oligopolistic industry where firms compete as Cournot rivals. Assuming a subset of the oligopolists own a share in each other’s profits, we show that a symmetric cross-ownership can be profitable for any number of participating firms, provided that the initial resource stock owned by each firm is small enough. This is in sharp contrast with the static case where for any levels of non-controlling minority shareholdings, a symmetric cross-ownership is never (always) profitable if the relative number of participating firms is below (above) some lower (upper) threshold. When the relative number of participating firms is in between the two thresholds, profitability of cross-ownership depends on the level of shareholdings. We also highlight that cross-ownership can be preferable to a horizontal merger in terms of Cournot competition. Not only is it more profitable to do so, more importantly, it constitutes a shrewd strategy to avoid the possible legal challenges. Finally, we show that cross-ownership may turn out to be relatively less detrimental to society in a nonrenewable resource industry than other industries where resource constraints are absent. Thus, a specific analysis is needed when dealing with industries where resource constraints play an important role.
On the profitability of cross-ownership in Cournot nonrenewable resource oligopolies: Stock size matters
5 September 2022