Abstract
When a downstream producer enters backward into the input market, a "helping the rivals effect" exists: Such entry hurts the firm's downstream business as it increases upstream competition and thus benefits its rival downstream firms. This negative externality prevents the newly-created upstream unit from expanding. A spin-off enables the firm to credibly expand in the input market, thereby forcing its upstream competitors to behave less aggressively. Spin-offs occur in equilibrium if and only if the number of downstream firms exceeds a threshold level. When there is more than one integrated firm, a spin-off by a firm can trigger spin-offs by others that would not occur otherwise.
| Original language | English |
|---|---|
| Pages (from-to) | 977-993 |
| Number of pages | 17 |
| Journal | European Economic Review |
| Volume | 50 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 1 Jan 2006 |
Funding
sI thank Editor Esther Gal-Or, an associate editor, two anonymous referees, Stephen Chiu, Larry Qiu, Kamal Saggi, and Wen Zhou for valuable comments and suggestions which significantly improved the quality of this paper. The usual disclaimer applies.
Keywords
- Commitment effect
- Multilateral negotiations
- Spin-offs
- Successive Cournot oligopoly