Strategic Spin-offs of Input Division Ping LIN ∗ Abstract: When a downstream producer enters backward into the input market, a “helping the rivals effect” exists: Such entry hurts the firm’s downstream business as it increases upstream competition and thus reduces the input price for rival downstream firms. This negative externality prevents the newly-created upstream unit from expanding. A spin-off enables the firm to credibly expand in the input market, forcing the upstream competitors to behave less aggressively, a task direct entry could not accomplish. Spin-offs occur in equilibrium if and only if the number of downstream firms exceeds a certain threshold level. If several producers can each spin off their input division, a spin-off by one firm can trigger a spin-off by another firm that would not take place otherwise. Spin-offs lower welfare by worsening the double-marginalization problem. JEL Classification: L13, L22, L42 Keywords: Spin-off, commitment ∗ Department of Economics, Lingnan University, Hong Kong; plin@ln.edu.hk; Tel.: (852)2616 7203, Fax: (852)2891 7940. I thank Stephen Chiu, Larry Qiu, Kamal Saggi, and Wen Zhou for valuable comments and suggestions on an earlier draft of the paper.