Delegation of Authority in Oligopoly
Description
This paper studies the consequences of product-market competition on firms' decisions to delegate more or fewer decision-making responsibilities to managers. By simultaneously addressing the choice of both competitive actions and organizational design, the paper makes an attempt at bringing economic theory and management strategy closer together. I show that, for a given number of firms, an increase in market size increases centralization, as the owner of the firm finds it more costly to accept rent seeking by the managers. However, this increase in market size will lead to the entry of more firms, which calls for more decentralized decision making. Under reasonable conditions, the aggregate effect leads to a U-shaped relationship where firms in both small and large markets are characterized by high levels of discretion, while there is less discretion for intermediate market sizes. Stronger competition, as measured by an increase in product substitutability leads to more discretion in concentrated markets, but to less discretion in dispersed markets, in markets in which the possibilities for product differentiation are important, and in markets with high entry costs.