Product Differentiation, Strategic Divisionalization, and Persistence of Monopoly
Journal of Economics & Management Strategy, 1999, vol. 8, issue 4, 581-602
This paper analyzes the strategic incentive of oligopolists to create autonomous rival divisions when products are differentiated. We consider a two‐stage game where firms choose the number of autonomous divisions in the first stage and all the divisions engage in Cournot competition in the second. It is shown that product differentiation ensures the existence of an interior subgame perfect Nash equilibrium (SPNE), and the equilibrium number of divisions increases with the degree of substitution among products and the number of firms. Further, if divisions are allowed to divide further, they always will, which leads to total rent dissipation. Thus, parent firms have incentives to unilaterally restrict their divisions from further dividing. In the free‐entry equilibrium, it is found that the possibility of setting up autonomous divisions is a natural barrier to entry. Incumbents may persistently earn abnormally high profits. In the cases where product differentiation is difficult, the only pure‐strategy free‐entry SPNE is the monopoly outcome even if the entry cost is relatively low.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:8:y:1999:i:4:p:581-602
Ordering information: This journal article can be ordered from
http://www.blackwell ... ref=1058-6407&site=1
Access Statistics for this article
More articles in Journal of Economics & Management Strategy from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().