Managerial Incentives and the Price Effects of Mergers

27 Pages Posted: 3 Nov 2005

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 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.

Suggested Citation

Wickelgren, Abraham L., Managerial Incentives and the Price Effects of Mergers. Journal of Industrial Economics, Vol. 53, No. 3, pp. 327-353, September 2005. Available at SSRN: https://ssrn.com/abstract=811015

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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