Journal Articles

Divisionalization, Franchising, and Divestiture Incentives in Oligopoly

1996, American Economic Review

Michael R. Baye, Keith Crocker, Jiangdong Ju

Abstract

A two-stage game is used to model firms' strategic incentives to divide production among autonomous competing units through divisionalization, franchising, or divestiture. Firms simultaneously choose their number of competing units, which then engage in Cournot competition. While it is costly to form autonomous units, each firm does so in equilibrium, thus reducing firm profits and increasing social welfare relative to the case where firms cannot form competing units. With linear demand and costs, duopolists choose the socially optimal number of competing units; oligopolies with larger numbers of firms choose too many. The case of nonlinear demand is also examined. Copyright 1996 by American Economic Association.

Citation

Michael R. Baye, Keith Crocker, and Jiangdong Ju, "Divisionalization, Franchising, and Divestiture Incentives in Oligopoly,” American Economic Review, Vol. 86 (March 1996), pp. 223-236.

Kelley School of Business

Faculty & Research