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Divisionalization In Vertical Structures

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  • Ramón Faulí-Oller

    ()
    (Universidad de Alicante)

  • Lluís Bru

    ()
    (Universitat de les Illes Balears)

  • José Manuel Ordóñez de Haro

    (Universidad de Málaga)

Abstract

We study the incentives to create divisions by a firm once it is taken into account the vertical structures of an industry. Downstream firms, that must buy an essential input to 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 it. We show that incentives to divisonalize are severely reduced when compared with the standard results, and that even sometimes firms choose not to divisionalize at all. The 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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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2001-28.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 2001-28.

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Length: 21 pages
Date of creation: Nov 2001
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2001-28

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References

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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. Luis Corchón, 1991. "Oligopolistic Competition Among Groups," Working Papers. Serie AD 1991-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Corts, Kenneth S. & Neher, Darwin V., 2003. "Credible delegation," European Economic Review, Elsevier, vol. 47(3), pages 395-407, June.
  4. Chemla, G., 1999. "Downstream Competition, Foreclosure, and Vertical Integration," Papers 99-18, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
  5. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
  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.
  7. Richard J. Sexton, 2000. "Industrialization and Consolidation in the U.S. Food Sector: Implications for Competition and Welfare," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(5), pages 1087-1104.
  8. Chemla, Gilles, 2000. "Downstream Competition, Foreclosure, and Vertical Integration," CEPR Discussion Papers 2647, C.E.P.R. Discussion Papers.
  9. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Huck, Steffen & Konrad, Kai A. & Muller, Wieland, 2001. "Divisionalization in contests," Economics Letters, Elsevier, vol. 70(1), pages 89-93, January.
  11. Gonzalez-Maestre, M., 1997. "Divisionalization and Delegation in Oligopoly," UFAE and IAE Working Papers 403.97, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  12. 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.
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Cited by:
  1. Joao Carlos Correia Leitao, 2004. "Optimal Divisionalization for Selling Networks of Cable Television Services," Industrial Organization 0403004, EconWPA.

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