# On the social (sub)optimality of divisionalization under product differentiation

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## Abstract

We revisit the interplay between differentiation and divisionalization in a duopoly version of Ziss (Econ Lett 59:133–138, 1998). We model divisionalization as a discrete problem to prove that (i) firms may choose not to become multidivisional; and (ii) there may arise asymmetric outcomes in mixed strategies, due to the existence of multiple symmetric equilibria. If industry-wide divisionalization is the unique equilibrium, it can be socially efficient provided goods are *almost* perfect substitutes. Even small degrees of differentiation may suffice to make industry-wide divisionalization socially desirable because of the prevalence of consumers’ taste for variety over the replication of fixed costs.

## Keywords

Divisionalization Product differentiation Duopoly## JEL Classification

L13 L22 L41## Notes

### Acknowledgements

We would like to thank Giacomo Corneo, Flavio Delbono and two anonymous referees for precious comments and suggestions. The usual disclaimer applies.

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