Commitment, firm and industry effects in strategic divisionalization (JMP1)

Abstract

We modify the canonical two-stage game of strategic divisionalization by adding an initial stage to allow firms to credibly commit to whether they will create additional divisions or not. This generates a unique equilibrium prediction consistent with the key stylised fact that often only one of the mother firms alone creates independent divisions. Examples include GM versus Ford for national markets and many cases of franchising in local markets (e.g., Walmart vs Target, McDonald’s vs Burger King). A key implication for organization theory is that the adoption of the M versus the U-form is part of a strategic whole necessarily involving all competitors, rather than just intra-firm managerial and informational considerations as in the received theory.