Common ownership with downstream firm's voluntary investment

Abstract It is well known that common ownership lessens competition, which tends to decrease consumer and total surpluses. This study challenges this well‐known result by introducing downstream firms' voluntary investment. We consider a vertical market with one upstream firm and two downstream firms, where the downstream firms engage in voluntary investment that can reduce the upstream firm's marginal cost. We show that common ownership may increase consumer and total surpluses if the investment is sufficiently efficient. While our main model focuses on homogeneous goods with quantity competition, our main results are robust under differentiated goods in both quantity and price competition.