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

Author

Listed:
  • 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.

Suggested Citation

  • Samuel Cruz Alves Pereira & Pedro Cosme Costa Vieira, 2006. "How to control market power of activity centres? A theoretical model showing the advantages of implementing competition within organizations," FEP Working Papers 198, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:fepwps:198
    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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    More about this item

    Keywords

    Activity centres; internal market power; firm efficiency;

    JEL classification:

    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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