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Competing for a Quiet Life: An Organizational Theory of Market Structure

8 May 2019
San Francesco Complex - Classroom 2

"Competing for a Quiet Life: An Organizational Theory of Market Structure”, joint work with Andrew Newman and Zsolt Udvari.

We develop a property-rights model of endogenous market structure. Production of a homogenous good is carried out by substitutable, incentive-constrained teams. A market structure is a stable partition of a large population of these teams into firms. Teams can stand-alone as perfect competitors or instead sell their assets to third-party, profit-motivated HQs, thereby becoming their subordinates. HQs subsequently Cournot compete in the product market. Although individual teams are capacity constrained, there are no fixed costs of production, no limits to the supply of HQ's, nor any bounds on how many teams an HQ may own and operate without loss.

The equilibrium market structure is typically an oligopoly, sometimes accompanied by a competitive fringe. Contracting imperfections, rather than fixed costs or scale economies, emerge as the source of market power. A fundamental hold-out problem places lower and upper bounds on the degree of market concentration. The quiet life cost structure, in which private costs endogenously decrease with firm size, and the imperfections in contracting play essential roles: without them perfect competition is the only outcome.

We show that concentration may increase with the size of the market, unlike in the standard Cournot entry model. Entry barriers and competition policy may have distinct effects depending on the demand regime, which has implications for optimal policy in rich vs. developing countries.

Patrick Legros - Université libre de Bruxelles ECARES and Northeastern University