How to control market power of activity centres? A theoretical model showing the advantages of implementing competition within organizations
AbstractOne 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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Bibliographic InfoPaper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 198.
Length: 11 pages
Date of creation: Jan 2006
Date of revision:
Activity centres; internal market power; firm efficiency;
Other versions of this item:
- Pedro Cosme Vieira & Samuel Pereira, 2007. "How to control market power of activity centers? A theoretical model showing the advantages of implementing competition within organizations," Economics Bulletin, AccessEcon, vol. 7(6), pages 1-8.
- M11 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Production Management
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-01-24 (All new papers)
- NEP-COM-2006-01-24 (Industrial Competition)
- NEP-MIC-2006-01-24 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Armen A. Alchian & Harold Demsetz, 1971.
"Production, Information Costs and Economic Organizations,"
UCLA Economics Working Papers
10A, UCLA Department of Economics.
- Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
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