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Divisionalization in Vertical Structures

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Author Info
Bru, Lluís
de Haro, José-Manuel Ordóñez
Faulí-Oller, Ramon
Abstract

We study the incentives to firms to create divisions once the vertical structure of an industry is taken into account. Downstream firms, those that must buy an essential input from upstream firms, may create divisions. Divisionalization reduces their bargaining power against upstream firms. This effect must be weighted against the usual incentive to divisionalize, namely the increase in the share of the final market that a firm obtains through the process. We show that incentives to divisionalize are severely reduced when compared with the standard results, and even that sometimes firms choose not to divisionalize at all. This Paper also shows the implications of the former analysis on the internal organization of firms and on the incentives to vertically integrate.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3011.

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Date of creation: Oct 2001
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Handle: RePEc:cpr:ceprdp:3011

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Related research
Keywords: divisionalization intermediate markets secret contracts

Find related papers by JEL classification:
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  2. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March. [Downloadable!] (restricted)
  3. Huck, Steffen & Konrad, Kai A. & Muller, Wieland, 2001. "Divisionalization in contests," Economics Letters, Elsevier, vol. 70(1), pages 89-93, January. [Downloadable!] (restricted)
    Other versions:
  4. G. Chemla, 1999. "Downstream competition, foreclosure, and vertical integration," THEMA Working Papers 99-18, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
    Other versions:
  5. Corts, Kenneth S. & Neher, Darwin V., 2003. "Credible delegation," European Economic Review, Elsevier, vol. 47(3), pages 395-407, June. [Downloadable!] (restricted)
  6. Baye, Michael R & Crocker, Keith J & Ju, Jiandong, 1996. "Divisionalization, Franchising, and Divestiture Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 86(1), pages 223-36, March. [Downloadable!] (restricted)
  7. REY, Patrick & TIROLE, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005. [Downloadable!]
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joao Carlos Correia Leitao, 2004. "Optimal Divisionalization for Selling Networks of Cable Television Services," Industrial Organization 0403004, EconWPA. [Downloadable!]
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