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Cost Hetrogeneity and Strategic Divisionalization

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Keywords
  • L11 - Production
  • Pricing
  • And Market Structure
  • Size Distribution Of Firms

Abstract

In this note, we consider a simple duopoly environment in which two parent firms compete in a market. We assume that there are cost differentials between these two parent firms. The parent firms' choices of divisionalization are modeled as a two-stage game. It will be shown that the number of divisions of a parent firm with a cost advantage (i.e., lower marginal costs) is relatively large. The results imply that the cost advantage of one parent firm will be magnified through divisionalization decisions.

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