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MANAGERIAL INCENTIVES AND THE PRICE EFFECTS OF MERGERS *
Author(s) -
Wickelgren Abraham L.
Publication year - 2005
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6427.2005.00258.x
Subject(s) - unobservable , incentive , microeconomics , shareholder , market power , competition (biology) , industrial organization , product market , profit (economics) , economics , quality (philosophy) , product (mathematics) , business , monopoly , corporate governance , finance , econometrics , ecology , philosophy , geometry , mathematics , epistemology , biology
Most analysis of market power assumes that managers are perfect agents for shareholders. This paper relaxes that assumption. When managers of a multi‐product firm exert unobservable effort to improve product quality, there is a trade‐off between providing adequate effort incentives and ensuring sufficient price‐coordination between the product divisions. This makes some intra‐firm price competition optimal, explaining why many multi‐product firms allow for competition between divisions. When there are effort spillovers, the optimal amount of price competition can be as great as when the products are under separate ownership. Even with some profit‐sharing, intra‐firm price competition can reduce quality‐adjusted price, which has important implications for antitrust policy.