The interownership index

Abstract

This thesis is an investigation into the relationship that exists between horizontal interlocking cross-ownership and market competition in the Canadian banking market. A literature review examines the effects of cross-ownership and its relation to market concentration. It is determined that traditional market concentration measures, notably the Herfindahl-Hirschman index (HHI), fail to account for cross-ownership between market players. By adding a cross-ownership variable to the HHI, a new proposed index is derived that proportionally augments the index value in relationship to the level of cross-ownership in the market. This index is tentatively called an interownership index (IOI). The Canadian banking market is examined to validate the proposed index, and to demonstrate empirically the effects of cross-ownership discussed in the literature review. Share ownership of all five major Canadian banks from the 2013 fiscal year is examined. The results show considerable interlocking cross-ownership amongst direct competitors, resulting in an IOI value 34.18% higher than the HHI when cross-ownership is factored in. The IOI’s behaviour is consistent with the hypothesis. To empirically demonstrate the effects of cross-ownership, examinations of pricing variance and product competition are compared to the US banking market, in which no quantifiable cross-ownership exists. Significant differences are observed in pricing and competitive strategy between comparable markets with and without cross-ownership. It is ultimately concluded that the behaviour observed in the Canadian banking market is consistent with previous research that demonstrates that cross-ownership results in anticompetitive behaviour. The IOI is proposed as an alternative to market concentration measurement for antitrust authorities.