DIVIDE-AND-CONQUER - ON THE PROFITABILITY OF FORMING INDEPENDENT RIVAL DIVISIONS

In this paper, a two-stage model is presented in which firms choose market structure in stage one and play a Cournot game in the second stage. In a one-period game, if a single firm is given a choice in stage one, it will choose to form independent rival divisions rather than remain as a unified whole. The subgame perfect equilibrium outcome of this game is the same as in a Stackelberg game in which one firm commits to quantity prior to the simultaneous choice of quantity by its rivals. In a multi-period game, with firms making alternating market structure choices, it is possible to generate endogenous cyclical fluctuations in market concentration.