Cross‐Ownership and Welfare‐Inferior Price Competition with Relative Profit Delegation Contracts

ABSTRACT We consider management reward contracts based on relative profit performance under cross‐ownership and find nonequivalence of price and quantity competition. We also examine an endogenous choice of competition mode under unilateral cross‐ownership and show that the welfare‐inferior price competition can appear unless the product's substitutability is large enough, while this inferior result prevails under bilateral cross‐ownership. Our findings suggest that cross‐ownership between price‐competing firms is consistently anticompetitive under managerial delegation with relative profit delegation, highlighting that policy concern for competitive law should carefully monitor not only the intensity of market competition mode but also the product's substitutability.