Organizational Structure and Product Market Competition

Abstract

We analyze an interaction between a firm’s choice of organizational structure and competition in the product-market. Two organizational structures are considered, namely a centralized-organization, whereby formal authority is retained by a principal, and a decentralized-organization, whereby formal authority is delegated to an agent. We show that the choice of organizational structure hinges on a trade-off between operating-profit and managerial effort. The principal may prefer to choose an organizational structure that generates lower operating-profit to motivate the agent to work hard. The choice of organizational structure may also determine whether the rival is active in the market or forced to exit the market.Formal and Real Authority, Delegation Structure, Product Market Competition