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Essays on strategic divisionalization and decentralization

University of British Columbia

The objective of the three essays of this doctoral dissertation is to investigate the strategic choices of organizational forms by competing firms in various environments. The first essay, which is a joint work with Professor Guofu Tan, provides an alternative theory of divestitures that relies on product-line complementarities and product market competition. We consider a simple environment in which there axe two firms, each supplying a group of complementary products and the products across groups axe imperfect substitutes. We model the firms' choices of divesting and pricing as a two-stage game. The duopohsts simultaneously choose their divestiture strategies in the first stage of the game and the independent divisions compete by setting prices in the second. It is shown that, when competing with each other, firms with complementary product-lines have incentives to split into multiple independent divisions supplying complementary products and services. Such divestitures increase prices and the parent firms' values but reduce aggregate social welfare. Moreover, the degree of divestiture, as we illustrate in the linear demand case, depends on the severity of competition and the nature of product-lines. Then, intensified competition due to deregulation, trade liberalization and entry may trigger divestitures. We further show that if two firms axe able to coordinate their divestiture strategies, they can achieve the joint monopoly prices and profits in a non-cooperative price game. The second essay analyzes the strategic incentive of oligopolists to create autonomous rival divisions when products are differentiated. We consider a two stage game where firms choose the number of autonomous divisions in the first stage and all the divisions engage in Cournot competition in the second. It is shown that product differentiation ensures the existence of an interior subgame perfect Nash equiubrium, and the equilibrium number of divisions increases with the degree of substitution among products and the number of firms. Further, if divisions are allowed to further divide, they always will, which leads to total rent dissipation. Thus, parent firms have incentives to unilaterally restrict their divisions from further dividing. In the free entry equihbrium, it is found that the possibility of setting up autonomous divisions is a natural barrier to entry. Incumbents may persistently earn abnormally high profits. In the cases where product differentiation is difficult, the only pure strategy free entry equilibrium is the monopoly outcome even if the entry cost is relatively low. The third essay develops a game theoretic model to analyze strategic leasing behaviors of landowners in a nonexclusively owned common oil pool. The oil field development is modeled as two more-or-less independent one-stage noncooperative game. The landowners choose leasing strategies in the first stage, and independent lease operators choose extraction strategies in the second. It is found that, in a nonexclusively owned oil field, it is individually rational for a landowner to unilaterally subdivide his landholding and delegate production rights to multiple independent firms, even though more dispersed production control leads to heavier common pool losses. Moreover, the degree of landownership concentration determines the degree of production concentration. The more fragmented the land ownership, the lower is the degree of production concentration i n equilibrium. The analysis offers an explanation for the puzzling landowners' leasing behaviors in U . S . onshore oil fields.

Thesis/Dissertation

application/pdf

2009-07-03

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http://hdl.handle.net/2429/10143

Economics

University of British Columbia

UBCV

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