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Drastic innovation reduces firms’ incentives to create divisions

Antonio Tesoriere ()
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Antonio Tesoriere: SEAS, Università di Palermo

Economia Politica: Journal of Analytical and Institutional Economics, 2021, vol. 38, issue 3, No 8, 994 pages

Abstract: Abstract I study a game in which two firms create independent divisions, then they choose whether to do R&D so as to reduce their divisions’ marginal costs, and then the divisions compete in the market. I provide necessary and sufficient conditions under which the game has an equilibrium in pure strategies, and I show that the game has an equilibrium only if each firm threatens that if the rival creates more divisions it will use R&D to foreclose the market. The case we find in the literature, in which firms flood the market with their divisions, should happen only in industries with low returns to R&D.

Keywords: Multidivisional form; R&D; Exit (search for similar items in EconPapers)
JEL-codes: L13 O3 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s40888-020-00176-7

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