Allocating cost reducing investments over competing divisions

Antonio Tesoriere

No 2007036, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper examines a three-stage model of divisionalization where, first, two parent firms create independent units, second, the parent firms allocate cost reduction levels over these units, and third, the resulting units compete in a Cournotmarket given their current costs of production. The introduction of the cost reduction phase is shown to reduce the incentives toward divisionalization severely, relative to other existing models. Namely, the scope for divisionalization in equilibrium reduces as the marginal cost of the cost reducing investment decreases, and eventually vanishes. A second-best welfare analysis shows that, for any given market structure, the equilibrium investment decisions of the parent firms are socially optimal. In addition, the no divisionalization outcome is sustainable in equilibrium only if it is socially optimal.

Keywords: divisionalization; horizontal mergers; research joint ventures (search for similar items in EconPapers)
JEL-codes: L11 L13 L22 (search for similar items in EconPapers)
Date: 2007-05-01
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2007036

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