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How to control market power of activity centres? A theoretical model showing the advantages of implementing competition within organizations

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  • Samuel Cruz Alves Pereira

    ()
    (Faculdade de Economia, Universidade do Porto)

  • Pedro Cosme Costa Vieira

    ()
    (Faculdade de Economia, Universidade do Porto)

Abstract

One important issue in firms’ governance is how to create incentives so that activity centres can become more efficient. In this paper, we first introduce an agency contract where the salary of the manager of an activity centre that produces an intermediate product is dependent of its performance. Secondly, we add competition within the organization. This latter point is new in the literature. We then develop a "static analysis" comparing a firm that has only one activity centre producing an intermediate product with another firm that has two activity centres producing the same intermediate product, in a context where the technology manifests increasing returns to scale. We conclude that the introduction of internal competition makes the firm globally more efficient, even though it cannot fully explore the existence of increasing returns to scale.

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File URL: http://www.fep.up.pt/investigacao/workingpapers/06.01.09_WP198_samuelpedro.pdf
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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 198.

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Length: 11 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:por:fepwps:198

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Keywords: Activity centres; internal market power; firm efficiency;

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  1. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
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