Divide and conquer On the profitability of forming independent rival divisions

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Abstract

In this paper, a two-stage model is presented in which firms choose market structure in stage one and play a Cournot game in the second stage. In a one-period game, if a single firm is given a choice in stage one, it will choose to form independent rival divisions rather than remain as a unified whole. The subgame perfect equilibrium outcome of this game is the same as in a Stackelberg game in which one firm commits to quantity prior to the simultaneous choice of quantity by its rivals. In a multi-period game, with firms making alternating market structure choices, it is possible to generate endogenous cyclical fluctuations in market concentration.

Original languageEnglish (US)
Pages (from-to)365-371
Number of pages7
JournalEconomics Letters
Volume40
Issue number3
DOIs
StatePublished - Nov 1992

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