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Winner-Picking or Cross-Subsidization? The Strategic Impact of Resource Flexibility in Business Groups

We show that in business groups with efficient internal capital markets both winner-picking and cross-subsidization may occur. Depending on the amount of internal resources, a group may either exit a market in response to increased competition, or rather channel funds to the subsidiary operating in that market. This has important implications for the strategic impact of group membership. Affiliation to a monopolistic subsidiary can make a cash-rich stand-alone firm more vulnerable to entry deterrence. Conversely, a cash-poor firm becomes less sensitive to its financial constraints upon affiliation to a group, and thus less vulnerable to entry deterrence. Finally, resource flexibility within a group makes subsidiaries' reaction functions flatter, thus discouraging rivals' strategic commitments when entry is accommodated.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 93.

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Date of creation: 02 Mar 2003
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Publication status: Published in RAND Journal of Economics, 2005, vol. 36, pages 193-214
Handle: RePEc:sef:csefwp:93
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