DeFiPP research seminar by Patrick Legros (ULB)

Competing for the Quiet Life: Toward an Organizational Theory of Market Structure

We develop an incomplete-contracts model of endogenous market structure for a homogeneous good industry. There are a large number of identical incentive-constrained producers who may stand alone as price-taking competitors or horizontally integrate with others by selling out to profit-motivated professional managers, who then Cournot compete in the product market. Despite the absence of significant technological non-convexities, the equilibrium market structure is typically an oligopoly. Thus, contracting imperfections can be a distinct source of market power. The optimal policy may favor some degree of oligopoly. Unlike standard endogenous entry models, concentration may increase with the size of the market, suggesting a demand-side driver of recent trends.

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