Strategic spin-offs of input divisions
European Economic Review
Commitment effect, Multilateral negotiations, Spin-offs, Successive Cournot oligopoly
When a downstream producer enters backward into the input market, a "helping the rivals effect" exists: Such entry hurts the firm's downstream business as it increases upstream competition and thus benefits its rival downstream firms. This negative externality prevents the newly-created upstream unit from expanding. A spin-off enables the firm to credibly expand in the input market, thereby forcing its upstream competitors to behave less aggressively. Spin-offs occur in equilibrium if and only if the number of downstream firms exceeds a threshold level. When there is more than one integrated firm, a spin-off by a firm can trigger spin-offs by others that would not occur otherwise.
Copyright © 2005 Elsevier B.V.
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Lin, P. (2006). Strategic spin-offs of input divisions. European Economic Review, 50(4), 977-993. doi: 10.1016/j.euroecorev.2004.12.001