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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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    Citations

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    Cited by:

    1. Ramón Faulí-Oller & Lluís Bru & José Manuel Ordóñez de Haro, 2001. "Divisionalization In Vertical Structures," Working Papers. Serie AD 2001-28, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Luis Gautier & Mahelet G. Fikru, 2024. "Electric Utility Mergers in the Presence of Distributed Renewable Energy," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 63-92, Springer.
    3. Antonio Tesoriere, 2021. "Drastic innovation reduces firms’ incentives to create divisions," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(3), pages 971-994, October.
    4. 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.
    5. Luca Lambertini & Giuseppe Pignataro, 2019. "On the social (sub)optimality of divisionalization under product differentiation," Journal of Economics, Springer, vol. 128(3), pages 225-238, December.
    6. László Á. Kóczy, 2018. "Partition Function Form Games," Theory and Decision Library C, Springer, number 978-3-319-69841-0, December.
    7. Tsygankova, Marina, 2010. "When is a break-up of Gazprom good for Russia?," Energy Economics, Elsevier, vol. 32(4), pages 908-917, July.
    8. Gonzalez-Maestre, Miguel, 2001. "Divisionalization with spatial differentiation," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1297-1313, September.
    9. Kangsik Choi, 2022. "Delegation in multiproduct downstream firms with heterogeneous channels," Journal of Economics, Springer, vol. 135(1), pages 75-102, January.
    10. Marina Tsygankova, 2007. "When is Mighty Gazprom Good for Russia?," Discussion Papers 526, Statistics Norway, Research Department.
    11. Ramon Fauli-Oller, 2024. "Divisionalization and symmetric product differentiation," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 211-217, December.
    12. Alexander Kempf & Stefan Ruenzi, 2008. "Tournaments in Mutual-Fund Families," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
    13. Fauli-Oller, Ramon, 1997. "On merger profitability in a Cournot setting," Economics Letters, Elsevier, vol. 54(1), pages 75-79, January.
    14. Miguel González-Maestre, 1993. "Divisionalization In Markets With Hetergeneous Goods," Working Papers. Serie AD 1993-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    15. Lasheng Yuan, 1999. "Product Differentiation, Strategic Divisionalization, and Persistence of Monopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 581-602, December.
    16. Ramon Fauli-Oller & Miguel González-Maestre, 2024. "Sequential licensing with several competing technologies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 15(2), pages 179-201, June.

    More about this item

    Keywords

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    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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