AbstractWe evaluate the incentives to create within‐industry independent divisions once the vertical structure of the industry is considered. Divisionalization allows a firm to gain market share in the final market, but it also leads to an increase in total payments to the input supplier. The less competitive the upstream market, the more important the second effect will be, and this reduces the profitability of divisionalization. As a consequence, a less competitive upstream segment leads to a lower total number of divisions in equilibrium and a less competitive final market, harming end consumers who will face higher prices.