%0 Journal Article
%T Sequential Divestiture and Firm Asymmetry
%A Wen Zhou
%J Economics Research International
%D 2013
%I Hindawi Publishing Corporation
%R 10.1155/2013/352847
%X Simple Cournot models of divestiture tend to generate incentives to divest which are too strong, predicting that firms will break up into an infinite number of divisions resulting in perfect competition. This paper shows that if the order of divestitures is endogenized, firms will always choose sequential, and hence very limited, divestitures. Divestitures favor the larger firm and the follower in a sequential game. Divestitures in which the larger firm is the follower generate greater industry profit and social welfare, but a smaller consumer surplus. 1. Introduction Firms often spin off divisions that compete directly with the parent business. For example, Siemens planned in early 2009 to divest its 34% stake in AREVA NP, a Franco-German joint venture in nuclear reactors, and develop its own nuclear capabilities (The Economist, 1/29/09). Fast-food chain Wendy's spun off fast-growing Tim Hortons in 2006 after realizing that ¡°Tim's was beginning to compete directly with Wendy's¡± (The Economist, 9/23/06). Note that such spinoffs promise to increase competition rather than reduce it. On August 3, 2010, Ford Motor Company completed the sale of Volvo Cars to Chinese carmaker Geely for $1.8 billion. Ford CEO Alan Mulally said that the divestiture ¡°will allow us to sharpen our focus on the Ford brand around the world and continue to deliver on our One Ford plan serving our customers with the very best cars and trucks in the world¡± (AutoWeek, 8/3/10). Geely's president Li Shufu remarked that Volvo would now have the freedom to ¡°enter market segments that were previously closed to it because they were occupied by models from Jaguar, Land Rover or Ford itself¡± (The Economist, 3/31/10). Separated from Ford, Volvo will surely compete with its old stablemate in the premium car market. Obviously Ford has created a competitor through the divestiture, and one wonders why it wanted to do so. Would not it have been better for Ford to keep Volvo under its roof and thus contain the competition between the two brands?1 As these examples show, divestitures are very common in the business world, and many divestitures create direct competitors for the parent business.2£¿£¿This seems contrary to the common understanding that a company should seek to minimize competition. Why would a company ever want to spin off a business which will compete directly with itself? The answer lies in the responses from competitors. Although the newly created competition will eat into the parent company's business, it also applies pressure on rival companies. If the separation succeeds in squeezing
%U http://www.hindawi.com/journals/ecri/2013/352847/