Allocating cost reducing investments over competing divisions

Antonio Tesoriere

Risultato della ricerca: Article

Abstract

This paper examines a three-stage model of divisionalization where,first, two parent firms create independent units, second, the parent firms allocate costreduction levels over these units, and third, the resulting units compete in a Cournotmarket given their current costs of production. The introduction of the cost reductionphase is shown to reduce the incentives toward divisionalization severely, relative toother existing models. Namely, the scope for divisionalization in equilibrium reducesas the marginal cost of the cost reducing investment decreases, and eventually vanishes.A second-best welfare analysis shows that, for any given market structure, theequilibrium investment decisions of the parent firms are socially optimal. In addition,the no divisionalization outcome is sustainable in equilibrium only if it is sociallyoptimal. (JEL classification: L11, L13, L22).
Lingua originaleEnglish
pagine (da-a)1-24
Numero di pagine24
RivistaCore discussion paper
Volume2007
Stato di pubblicazionePublished - 2007

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Costs
Divisionalization
Marginal cost
Investment decision
Incentives
Market structure
Cost of production
Welfare analysis
Stage model
JEL classification

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Allocating cost reducing investments over competing divisions. / Tesoriere, Antonio.

In: Core discussion paper, Vol. 2007, 2007, pag. 1-24.

Risultato della ricerca: Article

Tesoriere, A 2007, 'Allocating cost reducing investments over competing divisions', Core discussion paper, vol. 2007, pagg. 1-24.
Tesoriere A. Allocating cost reducing investments over competing divisions. Core discussion paper. 2007;2007:1-24.
Tesoriere, Antonio. / Allocating cost reducing investments over competing divisions. In: Core discussion paper. 2007 ; Vol. 2007. pagg. 1-24.
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AB - This paper examines a three-stage model of divisionalization where,first, two parent firms create independent units, second, the parent firms allocate costreduction levels over these units, and third, the resulting units compete in a Cournotmarket given their current costs of production. The introduction of the cost reductionphase is shown to reduce the incentives toward divisionalization severely, relative toother existing models. Namely, the scope for divisionalization in equilibrium reducesas the marginal cost of the cost reducing investment decreases, and eventually vanishes.A second-best welfare analysis shows that, for any given market structure, theequilibrium investment decisions of the parent firms are socially optimal. In addition,the no divisionalization outcome is sustainable in equilibrium only if it is sociallyoptimal. (JEL classification: L11, L13, L22).

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