Oligopolistic competition among groups

Sometimes large corporations create several firms which compete in the same market. There are, at least, three different explanations of this policy: (a) under decreasing returns production efficiency requires plant diversification, (b) competition alleviates incentive problems due to moral hazard, and (c) competing firms are a credible commitment to Stackelberg leadership of the group. In this paper we study the impact on market equilibrium of this kind of decentralization by mean s of two examples, focusing our attention on point (c) aboye. In order to keep effects (a) and (b) away we will as sume constant returns to scale and complete information. We also discuss briefly how econornies of scale can affect our conc1usions. In our conditions, it may be argued that no group would wish to set up more than one plant, since what it can be achieved by mean s of two plants can be achieved by one with superior coordination. We will see that the aboye conjecture is falseo In fact under linear or unit-elastic inverse demand functions perfect competition us the unique Subgame Perfect Nash Equilibrium when the number of groups is at least three. The intuitive explanation of this paradox is that by creating a new firm a group can get c10ser to the Stackelberg point with this group as a leader, i.e. to crea te an independent firm is a credible commitment. In our model each group is in a Prisioner's dilemma-like situation since by increasing the number of firms makes itself better off but if all groups follow the same policy, profits per group will fallo In other words, decentralization of decisions which implies that control over firms within the group is lost up to sorne extent enhances group performance given the behavior of competitors. However if all groups follow the same policy, under constant returns, monopoly power vanishes.