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Divisionalization in Vertical Structures

Author

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  • Faulí-Oller, Ramon
  • Bru, Lluís
  • de Haro, José-Manuel Ordóñez

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.

Suggested Citation

  • Faulí-Oller, Ramon & Bru, Lluís & de Haro, José-Manuel Ordóñez, 2001. "Divisionalization in Vertical Structures," CEPR Discussion Papers 3011, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:3011
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    Cited by:

    1. Joao Carlos Correia Leitao, 2004. "Optimal Divisionalization for Selling Networks of Cable Television Services," Industrial Organization 0403004, University Library of Munich, Germany.
    2. Tomomichi Mizuno, 2009. "Divisionalization And Horizontal Mergers In A Vertical Relationship," Manchester School, University of Manchester, vol. 77(3), pages 317-336, June.

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    Keywords

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    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

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