Organizational Structure and Product Market Competition

Authors


  • We thank conference participants at the Far Eastern and South Asia Meeting of the Econometric Society 2008 held at the Singapore Management University. This research was initiated when we were affiliated to the Department of Economics, National University of Singapore. We gratefully acknowledge their support. We also acknowledge research grant support from Sogang University and Nanyang Technological University.

Abstract

This paper explores the link between delegation of authority and product market competition. It considers a firm that is contemplating entering a market served by an incumbent. The firm can adopt either a decentralized or a centralized authority structure. In the former, authority is delegated to an agent, while in the latter, it is retained by the principal. We address the questions of how the toughness of future product market competition affects the delegation decision, and how this decision in turn affects product market competition. The delegation decision is determined by a trade-off between inducing the agent to take greater initiative and accepting lower operating profits from a less efficient decision taken by the agent.

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