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On the competitive effects of divisionalization

  • Corchon, Luis C.
  • Gonzalez-Maestre, Miguel

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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Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 39 (2000)
Issue (Month): 1 (January)
Pages: 71-79

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Handle: RePEc:eee:matsoc:v:39:y:2000:i:1:p:71-79
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505565

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  1. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
  2. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
  4. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
  5. Morton I. Kamien & Israel Zang, 1990. "The Limits of Monopolization Through Acquisition," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 465-499.
  6. Stephen Polasky, 1993. "Divide And Conquer: On The Profitability Of Forming Independent Rival Divisions," Boston College Working Papers in Economics 210, Boston College Department of Economics.
  7. Yarrow, G K, 1985. "Welfare Losses in Oligopoly and Monopolistic Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 515-29, June.
  8. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, vol. 48(2), pages 479-89, March.
  9. Ziss, Steffen, 1998. "Divisionalization and product differentiation," Economics Letters, Elsevier, vol. 59(1), pages 133-138, April.
  10. William Novshek, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 473-486.
  11. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
  12. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  13. Marius Schwartz & Earl A. Thompson, 1986. "Divisionalization and Entry Deterrence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 307-321.
  14. 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.
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