Content area
Abstract
This thesis consists of three chapters that study the relationship between product market competition and productive efficiency. There is a long-standing belief among economists that a monopolist tends to slack off in his effort to control production costs while product market competition drives the manager of a firm to work harder. This thesis formally examines the validity of this belief in the context of three models where the manager chooses his effort level optimally.
Chapter 1 examines why monopoly pricing can cause productive inefficiency in an entrepreneurial firm where the owner of the firm manages it himself. The analysis demonstrates that output reduction due to monopoly pricing can actually lead to either the under-supply or the over-supply of effort. This distortion in effort, in turn, causes distortions in costs.
Chapter 2 sets up two principal-agent models to analyze productive inefficiency of monopoly in a managerial firm where ownership and management are separate. It is shown that under linear piece-rate incentive schemes, (i) the owner of monopoly firm chooses an incentive power different than that the owner of competitive firm does, and (ii) the manager of monopoly firm exerts less or more effort than the manager of competitive firm. Furthermore, productive inefficiency of monopoly can be exacerbated or mitigated by the managerial incentive problem, depending on the output-effort relationship in the cost function.
Chapter 3 analyzes how competition increases productive efficiency through the effect of competition-provided information in a model of rank-order variable-prize tournaments. Agents choose effort that affects output level and a principal identifies a winner and a loser based on the agents' output rank: the winner is rewarded a linear piece-rate incentive scheme while the loser receives a fixed prize. First, the model is analyzed to determine the conditions under which the variable-prize tournament contracts dominate both fixed-prize tournaments and linear piece rates. Second, the model is applied to inter-firm competition in the case of a managerial duopoly or two managerial monopolies, in which the owners offer their managers yardstick managerial contracts of variable-prize tournament based on the rank of the two firms' realized marginal costs.
