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Winner-Picking or Cross-Subsidization? The Strategic Impact of Resource Flexibility in Business Groups

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Author Info
Giacinta Cestone () (CSEF, Università di Salerno, Institut de Anàlisi Econòmica (CSIC), Barcelona and CEPR)
Chiara Fumagalli (Università Luigi Bocconi, Milano)

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Abstract

We show that in business groups with efficient internal capital markets both winner-picking and cross-subsidization may occur. Depending on the amount of internal resources, a group may either exit a market in response to increased competition, or rather channel funds to the subsidiary operating in that market. This has important implications for the strategic impact of group membership. Affiliation to a monopolistic subsidiary can make a cash-rich stand-alone firm more vulnerable to entry deterrence. Conversely, a cash-poor firm becomes less sensitive to its financial constraints upon affiliation to a group, and thus less vulnerable to entry deterrence. Finally, resource flexibility within a group makes subsidiaries' reaction functions flatter, thus discouraging rivals' strategic commitments when entry is accommodated.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 93.

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Date of creation: 02 Mar 2003
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Publication status: Published in RAND Journal of Economics, 2005, vol. 36, pages 193-214
Handle: RePEc:sef:csefwp:93

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Related research
Keywords: Expectations; Pension reform;

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Find related papers by JEL classification:
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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