Divisionalization with asymmetric production costs

Abstract

We study a standard duopoly model of simultaneous divisionalization and Cournot competition, assuming that firms have different marginal costs and divisions are costless. We obtain that in equilibrium only the divisions of the efficient firm are active because price is equal to the marginal cost of the inefficient firm. In the sequential case, however, this “entry-deterrence” strategy is only profitable for the efficient firm when its cost advantage is important enough. So in our setting, both firms coexist in equilibrium only when the cost difference is small enough and divisions are chosen sequentially.