Microeconomic Theory of Spinoff Decisions

The present study demonstrates that the product line choice of a firm depends on the elasticity of substitution between products (and the organizational and coordination requirements that it implies), the bargaining power of managers of different product divisions, and marketing prospects of each of...

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Published in:International journal of applied behavioral economics 2013-10, Vol.2 (4), p.36-51
Main Author: Rao, T V. S. Ramamohan
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Language:English
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Behavioral economics
Microeconomics
Product development
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description The present study demonstrates that the product line choice of a firm depends on the elasticity of substitution between products (and the organizational and coordination requirements that it implies), the bargaining power of managers of different product divisions, and marketing prospects of each of the products. A new product idea, put forward by an employee, will be integrated if a combination of these features obtains. A spinoff will result if any one, or more, of these conditions is not satisfied. In general, it is shown that a new product, which has a high elasticity of substitution with the existing products, will experience a spinoff due to lack of organizational capabilities to integrate it while a product with a low elasticity will spinoff only due to the incumbent management’s perception of low market potential and/or the strategic bargaining power of the incumbent management with respect to the existing product line.
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subjects Behavioral economics
Microeconomics
Product development
title Microeconomic Theory of Spinoff Decisions
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