Vertical Separation With Split‐Off Under Passive Ownership

ABSTRACT This study examines a vertical structure model where an integrated firm sells intermediate goods to downstream firms and produces final goods while a rival firm holds partial passive ownership (PPO) of the integrated firm. We investigate the effects of vertical separation with a split‐off under a downstream PPO when the integrated firm competes with both the rival firm and downstream firms in the final goods market. We find that separation decreases input price and final goods production by the split‐offed firm while increases consumer surplus and domestic welfare if the downstream firms are competitive, or when the degree of PPO is not sufficiently low. We also demonstrate that a split‐off under downstream PPO is more profitable but socially undesirable than the other separation types, including split‐off under upstream PPO and spin‐off. Finally, we provide some discussions on the variant scenarios and show that our main findings are robust.