Michael Powell
Kellog School of Management, Northwestern U.



(Tuesday, 19th May 2015)

Title : Organization and Competition

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One of the objectives of modern organizational economics is to go beyond the neoclassical characterization of firms as an exogenously specified "black box" consisting of a collection of feasible input-output combinations. In doing so, two of the central questions are: "What factors determine how firms are organized?" and "What factors determine firm-level productivity?" The now-standard approach is to take as given the underlying contractual environment (which is often incomplete in some particular way) and other characteristics perhaps specific to the firm (such as returns to managerial investments or the costs of adapting to unforeseen contingencies) and then to determine the optimal governance structure of the firm: in turn, the firm's production set is derived from underlying primitives.

In this workshop, I will discuss some recent work that seeks to connect firms' primitives to the competitive environment in which firms operate. The main question we will be interested in is: how do the firms' competitive environment and firm-level productivity interact? Addressing this question involves addressing two further questions. How does the nature and level of competition an individual firm faces shape its possibilities for how to organize and how it chooses to do so? And how do these choices by individual firms about how to organize aggregate up to determine the environment that other firms face? This equilibrium approach to organizational design allows us to revisit old questions such as "Is the competitive market efficient?" from a new perspective: one in which firm-level production sets are endogenous to the equilibrium. And it allows us to ask new questions, such as, "How do different firms respond differently to changes in aggregate conditions?" and "How does the underlying institutional environment shape the distribution of firm-level characteristics we should expect to see in an economy?"

Bibliographical references :

Raith, Michael. 2003. Competition, Risk, and Managerial Incentives. American Economic Review, 93(4): 1425-1436.

Powell, Michael. 2015. Productivity and Credibility in Industry Equilibrium. Working Paper.

If you are interested in some further background reading, I have posted a series of lecture notes for my Ph.D class on Organizational Economics on my website at: