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Divisionalization and symmetric product differentiation

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  • Ramon Fauli-Oller

    (Universidad de Alicante. Campus de Sant Vicent del Raspeig)

Abstract

I consider a standard two-stage game of divisionalization in which, in the first stage, two firms choose the number of divisions and, in the second stage, divisions compete independently à la Cournot. Two important assumptions are made. The creation of a division involves a fixed cost, and all divisions sell symmetrically differentiated goods. I obtain that differentiation stimulates the creation of divisions in equilibrium. This effect is so important that prices decrease with the level of product differentiation. As far as welfare is concerned, I obtain that the equilibrium number of divisions is lower than the one that it would maximize social welfare if no intervention at the market stage is feasible.

Suggested Citation

  • Ramon Fauli-Oller, 2024. "Divisionalization and symmetric product differentiation," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 211-217, December.
    • Handle: RePEc:spr:etbull:v:12:y:2024:i:2:d:10.1007_s40505-024-00274-w
    DOI: 10.1007/s40505-024-00274-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Divisionalization; Product differentiation; Fixed costs;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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