A THEORY OF FIRM SCOPE
Author(s)Hart, Oliver; Holmstrom, Bengt
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The formal literature on firm boundaries has assumed that ex post conflicts are resolved through bargaining. In reality, parties often simply exercise their decision rights. We develop a model, based on shading, in which the use of authority has a central role. We consider two firms deciding whether to adopt a common standard. Nonintegrated firms may fail to coordinate if one firm loses. An integrated firm can internalize the externality, but puts insufficient weight on employee benefits. We use our approach to understand why Cisco acquired StrataCom, a provider of new transmission technology. We also analyze delegation.
DepartmentMassachusetts Institute of Technology. Department of Economics
Quarterly Journal of Economics
Hart, Oliver, and Bengt Holmstrom. “A Theory of Firm Scope.” Quarterly Journal of Economics 125.2 (2010): 483-513. © 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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