Lunch Seminar Economics (LSE) - 2020/2021
Interviene: Maria Rosa Battaggion, Università di Bergamo
Abstract
When do rival companies choose to interlock, and thus, share their private information? This paper extends the model in Battaggion and Cerasi (2020) to analyze the strategic choice to interlock when one of the two rival companies is a vertical hierarchy and when the marginal costs in the industry are correlated. The choice to invite an executive from a rival company to sit on the board is analyzed within a duopoly where an integrated company competes against a vertically separated company in the product market. We show that interlocking directorates softens competition and emerges as an equilibrium outcome as both companies gain from disclosing information on their private costs. On the one hand, interlocking helps the vertically separated firm to save on the contractual rent when eliciting information from the exclusive agent; on the other hand, both companies benefit from the reduced uncertainty when they compete in the product market. We show, however, that the vertically separated company has more to gain from interlocking than the vertically integrated company when the degree of correlation between costs is sufficiently high, and allowing the vertically separated company to interlock may actually benefit consumers. Hence, our result provides a reason to allow interlocking by vertically separated companies due to cost savings.