Winner-Picking or Cross-Subsidization? The Strategic Impact of Resource Flexibility in Business Groups

Giacinta Cestone () and Chiara Fumagalli
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Chiara Fumagalli: Università Luigi Bocconi, Milano, http://www.unibocconi.it

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We show that in business groups with efficient internal capital markets both winner-picking and cross-subsidization may occur. Depending on the amount of internal resources, a group may either exit a market in response to increased competition, or rather channel funds to the subsidiary operating in that market. This has important implications for the strategic impact of group membership. Affiliation to a monopolistic subsidiary can make a cash-rich stand-alone firm more vulnerable to entry deterrence. Conversely, a cash-poor firm becomes less sensitive to its financial constraints upon affiliation to a group, and thus less vulnerable to entry deterrence. Finally, resource flexibility within a group makes subsidiaries' reaction functions flatter, thus discouraging rivals' strategic commitments when entry is accommodated.

Keywords: Expectations; Pension reform (search for similar items in EconPapers)
JEL-codes: E21 H55 (search for similar items in EconPapers)
Date: 2003-03-02
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Published in RAND Journal of Economics, 2005, vol. 36, pages 193-214

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