Skip to main content
main-content
Top

Table of Contents

Frontmatter

Chapter 1. Introduction

Abstract
Recent decades have been characterized by diversification and conglomerate mergers. These began in the United States in the 60s and 70s and then became important in Germany, particularly in the late 80s and early 90s.1 Most firms today are active in several markets and face global competitors who are also active in several markets. Multimarket activity allows synergies to be exploited but it may also lead to diseconomies of scope. The existence of multimarket competitors allows firms to direct their strategies towards these competitors and carry out multimarket strategies.
Silke Neubauer

Chapter 2. The impact of multimarket contact on the strategic behavior of firms

Abstract
The reasons and motives for diversifying into new geographical or product markets differ. The motive for entering multiple markets may be to realize economies of scope in production or administration that result from learning effects or the better use of indivisible resources.4 There may also be economies of scope in demand resulting from the existence of umbrella effects or switching costs5. The inadequacy of external capital markets may induce firms to expand their business in order to create an internal capital market.6 Multimarket operation may be efficient because it reduces the number of market transactions.7 There may also be managerial preferences for growth which — after growth opportunities in the core business have been exploited — can be satisfied only by diversification.8
Silke Neubauer

Chapter 3. The basic game with centralized decision making

Abstract
The following chapters deal with multi-stage games, in which firms are allowed to choose organizational devices before Cournot competition takes place. All games build on the same basic model, a two firm, two market model with cost linkages between markets. Therefore, the basic model will be introduced in this chapter and will be applied when developing the organizational games.
Silke Neubauer

Chapter 4. Strategic delegation and multimarket contact

Abstract
Big firms necessarily divide responsibility by means of delegation and divisionalization. A commonly held view is that greater flexibility and a more efficient management which result from flatter hierarchies provide the reason for this development. The literature on strategic delegation explores the strategic incentives for delegation when competitors interact with each other in the marketplace. For example, divisionalization of a one product firm, in which divisions compete with one another, may be a device for achieving a higher market share of the entire market.91 Alternatively, vertical delegation decisions that determine the degree of vertical specialization may affect the strategic position of a firm by affecting variable costs.92
Silke Neubauer

Chapter 5. Commitment and multimarket contact

Abstract
In chapter 3 it was shown that, within oligopolistic market structures, firms may enter new markets not only when there are synergies or economies of scope, but also when there are diseconomies of scope. If the marginal gains of entering a new market can outweigh the marginal negative impact on production costs caused by diseconomies of scope, the result is multimarket competition.111 Compared to a situation in which each firm specializes in one market and refrains from entering others’ home markets, the total effect on profits is negative, not only because of lost market power but also because of inefficiencies that may result from“over-diversification”.
Silke Neubauer

Chapter 6. Interdivisional information sharing and multimarket contact

Abstract
Demand uncertainty has always been an important feature of business environments. Shorter product cycles and the volatility of the global marketplace increase demand uncertainty for any given product. In the clothing industry, for example, the cost of demand uncertainty was estimated at $25 billion per year.143 General Motors loses upwards of 20% of potential sales because the desired vehicle is not available within the customers’ wait tolerance.144
Silke Neubauer

Chapter 7. Collusion and multimarket contact in a repeated game

Abstract
The ability of oligopolistic firms tacitly to exploit their potential market power and achieve better outcomes than the non-cooperative Nash equilibrium was first analyzed by Friedman (1971). Friedman argued that in an infinitely repeated game, the threat of future punishment can be used to enforce cooperative behavior. Starting from a collusive output level, duopolists may define future reactions to deviation from that output level (trigger or grim strategies), by which both the deviating and the punishing firm are hurt. Following Friedman, the sustainability of the collusive equilibrium can then be measured by calculating the critical discount factor that equalizes the long term gains from a collusive strategy with the gains from a deviating strategy. In a seminal article, Bernheim / Whinston (1990) claim that multimarket contact may help firms to sustain collusive outcomes whenever firms or markets differ from each other. They consider firms that compete in several markets. It is shown, that the opportunity these firms have to punish deviation from a cooperative equilibrium in every “contact” market may relax binding incentive constraints in a wide range of circumstances. Furthermore, whenever firms differ in their production costs or when scale economies are present, multimarket contact allows the development of “spheres of influence”, which enables firms to sustain higher levels of profits and prices. Bernheim and Whinston assume that markets are independent of one another. The mechanism driving their result is that the ability for multimarket firms to “pool” their incentive constraints across markets allows them to export “slack enforcement power” from one market to the other.
Silke Neubauer

Chapter 8. Conclusion

Abstract
In the previous chapters, the significance of organizational devices for multimarket firms’ strategies was analyzed. Applying a simple two market model, the focus was on the role of delegation decisions and commitment devices of multimarket firms. The importance of organizational design within two- or three-stage games and within the framework of an infinitely repeated game was stressed. Specifically, the following results were obtained. In chapter 4, it was shown that decentralizing decisions serves as a device for shaping managers’ reaction functions and hence for influencing the strategies chosen by the competitor. By compensating managers on the basis of a weighted average of corporate and divisional profits, firms determine how aggressive the managers’ strategies are in the market game. Firms always choose contracts which make managers play aggressively. If there are economies of scope, a high weight is put on corporate profits, thus making managers internalize positive cost spillovers, while diseconomies of scope suggest the placing of a high weight on divisional profits. Consumers benefit from such a strategy. Firms would prefer less aggressive behavior, but are in a prisoner’s dilemma situation with respect to their incentive choices.
Silke Neubauer

Backmatter

Additional information