6533b7cefe1ef96bd1257278

RESEARCH PRODUCT

Drastic innovation reduces firms’ incentives to create divisions

Antonio Tesoriere

subject

Marginal costEconomics and EconometricsR&ampSociology and Political ScienceFlood myth05 social sciencesMultidivisional form0506 political scienceMarket economyIncentiveExitD0502 economics and business050602 political science & public administrationInternational political economyEconomics050207 economicsFinance

description

I study a game in which two firms create independent divisions, then they choose whether to do R&D so as to reduce their divisions’ marginal costs, and then the divisions compete in the market. I provide necessary and sufficient conditions under which the game has an equilibrium in pure strategies, and I show that the game has an equilibrium only if each firm threatens that if the rival creates more divisions it will use R&D to foreclose the market. The case we find in the literature, in which firms flood the market with their divisions, should happen only in industries with low returns to R&D.

https://doi.org/10.1007/s40888-020-00176-7