Working Paper: CEPR ID: DP3011
Authors: Lluis Bru; Ramon Fauloller; Jos Manuel Ordez De Haro
Abstract: We study the incentives to firms to create divisions once the vertical structure of an industry is taken into account. Downstream firms, those that must buy an essential input from upstream firms, may create divisions. Divisionalization reduces their bargaining power against upstream firms. This effect must be weighted against the usual incentive to divisionalize, namely the increase in the share of the final market that a firm obtains through the process. We show that incentives to divisionalize are severely reduced when compared with the standard results, and even that sometimes firms choose not to divisionalize at all. This Paper also shows the implications of the former analysis on the internal organization of firms and on the incentives to vertically integrate.
Keywords: divisionalization; intermediate markets; secret contracts
JEL Codes: L10; L11; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| divisionalization (L23) | decreased bargaining power of downstream firms (L11) |
| decreased bargaining power of downstream firms (L14) | market outcomes (P42) |
| divisionalization (L23) | market share (L17) |
| vertical structure (L22) | incentives to divisionalize (L22) |
| downstream duopoly (D43) | equilibrium number of divisions (C62) |