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A Theory of Firm Scope

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  • Oliver Hart
  • Bengt Holmstrom

Abstract

The formal literature on firm boundaries has assumed that ex post conflicts are resolved through bargaining. In reality, parties often simply exercise their decision rights. We develop a model, based on shading, in which the use of authority has a central role. We consider two firms deciding whether to adopt a common standard. Nonintegrated firms may fail to coordinate if one firm loses. An integrated firm can internalize the externality, but puts insufficient weight on employee benefits. We use our approach to understand why Cisco acquired StrataCom, a provider of new transmission technology. We also analyze delegation.

Suggested Citation

  • Oliver Hart & Bengt Holmstrom, 2010. "A Theory of Firm Scope," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(2), pages 483-513.
    • Handle: RePEc:oup:qjecon:v:125:y:2010:i:2:p:483-513.
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    File URL: http://hdl.handle.net/10.1162/qjec.2010.125.2.483
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