Divisionalization and symmetric product differentiation

Ramon Fauli-Oller ()
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Ramon Fauli-Oller: Universidad de Alicante. Campus de Sant Vicent del Raspeig

Economic Theory Bulletin, 2024, vol. 12, issue 2, No 8, 217 pages

Abstract: Abstract I consider a standard two-stage game of divisionalization in which, in the first stage, two firms choose the number of divisions and, in the second stage, divisions compete independently à la Cournot. Two important assumptions are made. The creation of a division involves a fixed cost, and all divisions sell symmetrically differentiated goods. I obtain that differentiation stimulates the creation of divisions in equilibrium. This effect is so important that prices decrease with the level of product differentiation. As far as welfare is concerned, I obtain that the equilibrium number of divisions is lower than the one that it would maximize social welfare if no intervention at the market stage is feasible.

Keywords: Divisionalization; Product differentiation; Fixed costs (search for similar items in EconPapers)
JEL-codes: L10 L20 L40 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40505-024-00274-w

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