DP2557 In-House Competition, Organizational Slack and the Business Cycle
Author(s): | Rudolf Kerschbamer, Yanni Tournas |
Publication Date: | September 2000 |
Keyword(s): | Capacity, Competition, Demand Fluctuations, Slack |
JEL(s): | D20, D82, F23, L22 |
Programme Areas: | Industrial Organization |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=2557 |
This paper analyses the impact of variations of product demand on the amount of internal slack in multi-plant firms in a model in which facilities can produce output at a privately known cost up to a previously-determined capacity level. In such a model, the amount of slack in the firm is shown to be pro-cyclical. Indeed, as capacity constraints become tighter in booms, slack increases in booms, because the power of in-house competition is reduced, while the opposite is true in downturns. Also, in downturns the firm may use high-cost facili-ties even when low-cost plants are not running at capacity.