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Competitive Prices and Organizational Choices

  • Patrick Legros

    ()

    (Universite Libre de Bruxelles (ECARES) and CEPR)

  • Andrew F. Newman

    ()

    (Boston University and CEPR)

We construct a price-theoretic model of integration decisions and show that these choices may adversely affect consumers, even in the absence of monopoly power in supply and product markets. Integration is costly to implement but is effective at coordinating production decisions. The price of output helps to determine the organizational form chosen: there is an inverted-U relation between the degree of integration and product prices. Moreover, organizational choices affect output: integration is more productive than non-integration at low prices, and less productive at high prices. Since shocks to industries affect product prices, reorganizations are likely to take place in coordinated fashion and be industry specific, consistent with the evidence. Since the price range in which integration maximizes productivity generally differs from the one in which it maximizes managerial welfare, organizational choices will often be second-best inefficient. We show that there are instances in which entry of low-cost suppliers can hurt consumers by changing the terms of trade in the supplier market, thereby inducing reorganizations that raise prices.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-173.

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Length: 38 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:bos:iedwpr:dp-173
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Web page: http://www.bu.edu/econ/

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  1. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August.
  2. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, vol. 41(2), pages 193-229, June.
  3. Oliver Hart & John Moore, 2004. "On the Design of Hierarchies: Coordination versus Specialization," ESE Discussion Papers 117, Edinburgh School of Economics, University of Edinburgh.
  4. Lawrence J. White, 2002. "Trends in Aggregate Concentration in the United States," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 137-160, Fall.
  5. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Paola Conconi & Patrick Legros & Andrew F. Newman, 2008. "Trade Liberalization and Organizational Change," Development Working Papers 262, Centro Studi Luca d\'Agliano, University of Milano.
  7. Mathias Dewatripont & Patrick Bolton, 2004. "The firm as a communication network," ULB Institutional Repository 2013/9599, ULB -- Universite Libre de Bruxelles.
  8. Van den Steen, Eric, 2003. "Organizational Beliefs and Managerial Vision," Working papers 4224-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  10. Bertrand, Marianne & Mullainathan, Sendhil, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Scholarly Articles 3429713, Harvard University Department of Economics.
  11. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  12. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
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