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Allocating cost reducing investments over competing divisions

  • Antonio, TESORIERE
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    This paper examines a three-stage model of divisionalization wher, first, two parents firms create independent unts, second, the parents firms allocate cost reducing levels over these units, and third, the resulting uits compete in a Cournot mrket given their current costs of production. The introduction of the cost reduction phase is shown to reduce the incentives toward divisionalization severely, relative to other existing models. Namely, the scope for divisionalization in equilibrium reduces as the marginal cost of the cost reducing investment decreases, and eventually vanishes. A second-best welfare analysis shows that, for any given market structure, the equilibrium investment decisions of the parent firms are socially optimal. In addition, the no divisionalization outcome is sustainable in equilibrium only if it is socially optimal.

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    Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2007021.

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    Length: 26
    Date of creation: 01 Jul 2007
    Date of revision:
    Handle: RePEc:ctl:louvec:2007021
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    1. Rabah Amir & Val E. Lambson, 1998. "On the Effects of Entry in Cournot Markets," CIE Discussion Papers 1998-06, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    2. AMIR, Rabah & EVSTIGNEEV, Igor & WOODERS, John, 2001. "Noncooperative versus cooperative R&D with endogenous spillover rates," CORE Discussion Papers 2001050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Ngo Van Long & Antoine Soubeyran, 1999. "Cost Manipulation Games in Oligopoly, with Costs of Manipulating," CIRANO Working Papers 99s-13, CIRANO.
    4. W. Salant, Stephen & Shaffer, Greg, 1998. "Optimal asymmetric strategies in research joint ventures," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 195-208, March.
    5. repec:bla:restud:v:52:y:1985:i:4:p:715-18 is not listed on IDEAS
    6. Corchon, Luis C. & Gonzalez-Maestre, Miguel, 2000. "On the competitive effects of divisionalization," Mathematical Social Sciences, Elsevier, vol. 39(1), pages 71-79, January.
    7. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December.
    8. Ziss, Steffen, 1998. "Divisionalization and product differentiation," Economics Letters, Elsevier, vol. 59(1), pages 133-138, April.
    9. Suzumura, Kotaro, 1992. "Cooperative and Noncooperative R&D in an Oligopoly with Spillovers," American Economic Review, American Economic Association, vol. 82(5), pages 1307-20, December.
    10. repec:tpr:qjecon:v:98:y:1983:i:2:p:185-99 is not listed on IDEAS
    11. Gonzalez-Maestre, Miguel, 2001. "Divisionalization with spatial differentiation," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1297-1313, September.
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