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On the competitive effects of divisionalization

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Author Info

  • Luis Corchón

    ()
    (Universidad de Alicante)

  • Miguel González-Maestre

    (Universidad Autónoma de Barcelona)

Abstract

In this paper, we assume that firms can create independent divisions which compete in quantities in a homogeneous good market. Assuming complete information, identical firms and constant returns to scale, we prove the following: 1) Subgame Perfect Nash Equilibrium (SPNE) implies Perfect Competition if the number of firms is beyond some critical Level 2) This Level is small (sometimes one) under reasonable circumstances. Assuming a fixed cost per firm, SPNE implies that even if this cost is arbitrarily small and the number of potential firms is arbitrary Large, 3) the number of active firms is small (sometimes a monopoly) and 4) the total number of divisions is bounded above. This implies that the market under consideration is a Natural Oligopoly. Next we study a model in which there is both a fixed cost and an upper bound on the maximum number of divisions which can be created. We show that 5) when this upper bound tends to infinity and the fixed cost tends to zero, SPNE may imply either Perfect Competition or a Natural Oligopoly. Finally 6) it is shown that the above results hold under incomplete information.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-1994-10.pdf
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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 1994-10.

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Length: 35 pages
Date of creation: Jun 1994
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:1994-10

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Related research

Keywords: Divisionalization; limit theorems; perfect competition;

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Cited by:
  1. Antonio, TESORIERE, 2007. "Allocating cost reducing investments over competing divisions," Discussion Papers (ECON - Département des Sciences Economiques) 2007021, Université catholique de Louvain, Département des Sciences Economiques.
  2. Fauli-Oller, Ramon, 1997. "On merger profitability in a Cournot setting," Economics Letters, Elsevier, vol. 54(1), pages 75-79, January.
  3. Marina Tsygankova, 2007. "When is Mighty Gazprom Good for Russia?," Discussion Papers 526, Research Department of Statistics Norway.
  4. Kempf, Alexander & Ruenzi, Stefan, 2004. "Tournaments in mutual fund families," CFR Working Papers 04-02, University of Cologne, Centre for Financial Research (CFR).
  5. Ramón Faulí-Oller & Lluís Bru & José Manuel Ordóñez de Haro, 2001. "Divisionalization In Vertical Structures," Working Papers. Serie AD 2001-28, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Gonzalez-Maestre, Miguel, 2001. "Divisionalization with spatial differentiation," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1297-1313, September.
  7. Tsygankova, Marina, 2010. "When is a break-up of Gazprom good for Russia?," Energy Economics, Elsevier, vol. 32(4), pages 908-917, July.
  8. Miguel González-Maestre, 1993. "Divisionalization In Markets With Hetergeneous Goods," Working Papers. Serie AD 1993-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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