Moral Hazard, Mergers, and Market Power

34 Pages Posted: 16 Oct 2001

See all articles by Abraham L. Wickelgren

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Abstract

Most analysis of market power assumes that managers are perfect agents for shareholders. This paper relaxes that assumption. When managers of a multiproduct firm exert unobservable effort to improve product quality, price coordination incentives tradeoff with effort incentives. This makes some intra-firm price competition inevitable. When quality improving effort generates positive spillovers, the optimal amount of price competition can be as great or greater than when the products are under separate ownership. Even with some profit sharing, intra-firm price competition can be severe enough that quality adjusted price is lower under under common ownership.

Keywords: Moral Hazard, Mergers, Market Power, Managerial Incentives

JEL Classification: D20, L22, L40

Suggested Citation

Wickelgren, Abraham L., Moral Hazard, Mergers, and Market Power. Available at SSRN: https://ssrn.com/abstract=287058 or http://dx.doi.org/10.2139/ssrn.287058

Abraham L. Wickelgren (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

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