Organizational Design and the Intensity of Rivalry

Govert Vroom ()
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Govert Vroom: Krannert School of Management, Purdue University, 403 West State Street, West Lafayette, Indiana 47907

Management Science, 2006, vol. 52, issue 11, 1689-1702

Abstract: We analyze the effect of managerial compensation schemes and organizational structure on competitive behavior in imperfectly competitive product markets. Previous research suggests that in cases of strategic substitutability, firms tend to choose organizational structures and compensation systems that commit the firm to behaving aggressively in the product market, reducing firm and industry profits. In contrast, we show that while compensation and structure in isolation lead to excessive aggressiveness, the combination of these two internal choice variables may reverse the outcome--organizational design can be used as a commitment device to reduce competitive rivalry. Finally, we find that in equilibrium, firms may choose to be different; one firm is decentralized and uses incentives that commit it to being aggressive, while the other is centralized and uses incentives that commit it to being soft. Hence, endogenous firm heterogeneity in the form of organizational differentiation allows firms to avoid a mutually detrimental outcome.

Keywords: incentives; strategic delegation; organizational design; competitive strategy (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:52:y:2006:i:11:p:1689-1702

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