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

Samuel Cruz Alves Pereira () and Pedro Vieira
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Samuel Cruz Alves Pereira: Faculdade de Economia, Universidade do Porto

FEP Working Papers from Universidade do Porto, Faculdade de Economia 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.

Keywords: Activity centres; internal market power; firm efficiency (search for similar items in EconPapers)
JEL-codes: M11 M41 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2006-01
New Economics Papers: this item is included in nep-com and nep-mic
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Journal Article: How to control market power of activity centers? A theoretical model showing the advantages of implementing competition within organizations (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:198

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