Divisionalization with spatial differentiation

This paper assumes that firms can create independent divisions which compete in a market where the product is spatially differentiated. Our first result is that if the number of firms is exogenous and higher than some critical level, then the symmetric subgame perfect equilibrium converges to perfect competition when the cost of divisionalization converges to zero. Comparisons between the equilibrium level of divisionalization and the socially efficient are also obtained in this context. On the other hand, if we assume free entry and a fixed cost per firm, then the subgame perfect equilibrium implies, in some cases, a Natural Oligopoly or Monopoly. (C) 2001 Elsevier Science B.V. All rights reserved.