Divisionalization and Entry Deterrence

Licensing the market for technology

“…For instance, Corchon (1991) shows that, by delegating output decisions to divisions managers who do not internalize the inframarginal effects of their actions, the fir can virtually act as a Stackelberg leader and therefore collect larger profit (see also Baye et al, 1996). Similarly, Schwartz and Thompson (1986) argue that divisionalization can be used as a commitment to expand production and hence deter entry. The difference in our paper arises from the fact that with licensing contracts, rent extraction is not complete (because of transaction costs), that we allow for product differentiation across technologies and asymmetries across licensors (producers versus research labs), and that we endogenize the number of incumbents.…”

A Model of Competition between Online Lenders Offering Differing Loan Covenants

“…Furthermore, new entrants will always try to find their own market niche, e.g., lending to small businesses online, and that niche may be defined in terms of quality. Previous researchers have verified how it is often too costly for monopolists offering a given quality of goods to prevent entrants with a different quality product from entering the market; see [5], [6] and [7]. This section summarizes the development of the economic and finance literature that explores the dynamics and effects of this competitive process.…”

Inter-divisional Domain Overlap and Product Differentiation

“…Firms set up multiple divisions because, divisionalization could be more profitable than remaining as a unified whole: e.g., [19], [20], [27], [51], [54], [61]. This is because divisionalization allows firms to either deter entry or achieve Stackelberg leadership in the product market.…”

“…In an oligopoly market, incumbent firms set up new divisions to preempt entry. According to [54], divisionalization for preemption always dominates noninnovative entry, which ensures that incumbents in oligopolistic industries forestall all entry by non-innovative potential entrants. This is because independent and competing divisions would perfectly emulate the behaviors of potential entrants and thereby forestall a non-innovative entrant.…”

“…This is because independent and competing divisions would perfectly emulate the behaviors of potential entrants and thereby forestall a non-innovative entrant. Extended from [54], [61] argues that creating sufficient numbers of independent divisions or operating centers can deter entry.…”