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On the competitive effects of divisionalization

Author

Listed:
  • Luis Corchón

    (Universidad de Alicante)

  • Miguel González-Maestre

    (Universidad Autónoma de Barcelona)

Abstract

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.

Suggested Citation

  • Luis Corchón & Miguel González-Maestre, 1994. "On the competitive effects of divisionalization," Working Papers. Serie AD 1994-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:1994-10
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    References listed on IDEAS

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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
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    Cited by:

    1. Gonzalez-Maestre, Miguel, 2001. "Divisionalization with spatial differentiation," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1297-1313, September.
    2. Alexander Kempf & Stefan Ruenzi, 2008. "Tournaments in Mutual-Fund Families," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
    3. Tsygankova, Marina, 2010. "When is a break-up of Gazprom good for Russia?," Energy Economics, Elsevier, vol. 32(4), pages 908-917, July.
    4. Miguel González-Maestre, 1993. "Divisionalization In Markets With Hetergeneous Goods," Working Papers. Serie AD 1993-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    5. Marina Tsygankova, 2007. "When is Mighty Gazprom Good for Russia?," Discussion Papers 526, Statistics Norway, Research Department.
    6. Fauli-Oller, Ramon, 1997. "On merger profitability in a Cournot setting," Economics Letters, Elsevier, vol. 54(1), pages 75-79, January.
    7. Bru, Lluís & de Haro, José-Manuel Ordóñez & Faulí-Oller, Ramon, 2001. "Divisionalization in Vertical Structures," CEPR Discussion Papers 3011, C.E.P.R. Discussion Papers.
    8. Antonio, TESORIERE, 2007. "Allocating cost reducing investments over competing divisions," Discussion Papers (ECON - Département des Sciences Economiques) 2007021, Université catholique de Louvain, Département des Sciences Economiques.

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    More about this item

    Keywords

    Divisionalization; limit theorems; perfect competition;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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