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

Author

Listed:
  • Pedro Cosme Vieira

    () (Faculdade de Economia do Porto)

  • Samuel Pereira

    () (Faculdade de Economia do Porto)

Abstract

One important issue in firms' governance is how to 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.

Suggested Citation

  • 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.
  • Handle: RePEc:ebl:ecbull:eb-07g30003
    as

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    References listed on IDEAS

    as
    1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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