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Product Differentiation, Strategic Divisionalization, and Persistence of Monopoly

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  • Lasheng Yuan

Abstract

This paper analyzes the strategic incentive of oligopolists to create autonomous rival divisions when products are differentiated. We consider a two‐stage game where firms choose the number of autonomous divisions in the first stage and all the divisions engage in Cournot competition in the second. It is shown that product differentiation ensures the existence of an interior subgame perfect Nash equilibrium (SPNE), and the equilibrium number of divisions increases with the degree of substitution among products and the number of firms. Further, if divisions are allowed to divide further, they always will, which leads to total rent dissipation. Thus, parent firms have incentives to unilaterally restrict their divisions from further dividing. In the free‐entry equilibrium, it is found that the possibility of setting up autonomous divisions is a natural barrier to entry. Incumbents may persistently earn abnormally high profits. In the cases where product differentiation is difficult, the only pure‐strategy free‐entry SPNE is the monopoly outcome even if the entry cost is relatively low.

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  • Lasheng Yuan, 1999. "Product Differentiation, Strategic Divisionalization, and Persistence of Monopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 581-602, December.
    • Handle: RePEc:bla:jemstr:v:8:y:1999:i:4:p:581-602
    DOI: 10.1111/j.1430-9134.1999.00581.x
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    References listed on IDEAS

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    1. Corchon, Luis C. & Gonzalez-Maestre, Miguel, 2000. "On the competitive effects of divisionalization," Mathematical Social Sciences, Elsevier, vol. 39(1), pages 71-79, January.
    2. Polasky, Stephen, 1992. "Divide and conquer On the profitability of forming independent rival divisions," Economics Letters, Elsevier, vol. 40(3), pages 365-371, November.
    3. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    4. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
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    Cited by:

    1. Tan, Guofu & Yuan, Lasheng, 2003. "Strategic incentives of divestitures of competing conglomerates," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 673-697, May.
    2. Promit Kanti Chaudhuri, 2021. "Strategic inattention and divisionalization in duopoly," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-020, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Kazumichi, Iwasa & Toru, Kikuchi, 2007. "Cost Hetrogeneity and Strategic Divisionalization," MPRA Paper 5693, University Library of Munich, Germany.

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