TY - JOUR
T1 - Allocating cost reducing investments over competing divisions
AU - Tesoriere, Antonio
PY - 2007
Y1 - 2007
N2 - 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).
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).
KW - Divisionalization
KW - Horizontal Mergers
KW - Research Joint Ventures
KW - Divisionalization
KW - Horizontal Mergers
KW - Research Joint Ventures
UR - http://hdl.handle.net/10447/46996
UR - http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2007_36.pdf
M3 - Article
VL - 2007
SP - 1
EP - 24
JO - Core discussion paper
JF - Core discussion paper
ER -