Competition within Firms
| DOI | 10.1093/joclec/nhs004 |
| Pages | 167-185 |
| Date | 01 March 2012 |
| Year | 2012 |
| Published By | Oxford University Press |
COMPETITION WITHIN FIRMS
Lisa Bruttel
& Simeon Schudy
†
ABSTRACT
We investigate the role of incentives set by a parent firm for competition
among its subsidiaries. In a Cournot experiment, four subsidiaries of the same
parent operate in the same market. Parents earn a specific share of the joint
profit, and can choose how to distribute the remaining surplus (or loss).
Results show that parents allocating profits equally among their subsidiaries
reach outcomes close to collusion. However, almost half of the parent firms
employ a proportional sharing r ule instead. These groups end up with profits
around the Cournot level.
JEL: C92; D43; K21; L22
I. INTRODUCTION
When evaluating the competitiveness of a market, cartel authorities assume
that subsidiary companies with the sam e parent do not compete with each
other or with their parent. According to U.S. antitrust law, subsidiaries in a
single entity pursue the goals of the parent. Subsidiaries in a single entity are
thus not legally capable of conspiring with their parent firm
1
or with each
other under section 1 of the Sherman Act, because any conspiracy between
firms by definition requires at least two separate firms to be involved.
Similarly, antitrust law in the European Union presumes that firms belong-
ing to the same owner always act in the owner’s interest.
2
Professor, Department of Economics, University of Konstanz, Germany. Email: lisa.bruttel@
uni-konstanz.de.
†
Department of Economics, University of Konstanz, Germany. Email: simeon.schudy@uni-
konstanz.de. We thank Florian Englmaier, Martin Fink, Jochen Glo¨ckner, and participants of
seminars in Konstanz (Germany) and Kreuzlingen (Switzerland) and of the GfeW annual
meeting 2011 in Nuremberg (Germany) for very helpful suggestions.
1
See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984).
2
See AKZO Nobel v. Comm’n of the Eur. Communities, Case C-97/08 P, 2009 E.C.R.
I-08237 60 (Sept. 10, 2009) (“In the specific case of a parent company holding 100% of
the capital of a subsidiary which has committed an infringement, there is a simple
presumption that the parent company exercises decisive influence over the conduct of its
subsidiary.”).
Journal of Competition Law & Economics, 8(1), 167–185
doi:10.1093/joclec/nhs004
#The Author (2012). Published by Oxford University Press. All rights reserved.
For Permissions, please email: journals.permissions@oup.com
If subsidiaries commit a market infringement, a parent firm will at
least have the chance to prove that the subsidiary in fact did act inde-
pendently. This possibility does not exist in the field of merger control.
When judging whether to allow or forbid a merger, cartel authorities
must forecast whether the planned merger will lead to a concentration of
the market structure.
3
If the merger is generally considered to reduce
competition in that market, it will not be permitted. Authorities assume
that firms that are allowed to use their market power will always do so.
Firms do not have the option to prove that the merger will not affect
competition and that they are planning the merger for other reasons such
as efficiency improvements only.
The prediction of perfect cooperation between merged firms seems to
be a strong simplification and probably does not match the variety in
actual behavior. Legal ownership and actual control may in fact be effect-
ively separable, no matter whether this separation occur s intentionally or
by inability of the parent firm to control its subsidiaries. For example,
high monitoring costs may impede direct control over subsidiaries by
parent firms. Instead of direct control, parent firms may use incentive
schemes to coordinate their subsidiaries. We are interested in how such
intra-firm incentives evolve and whether these incentives affect competi-
tion among subsidiaries. Do endogenously determined incentive schemes
eventually lead to collusive behavior among subsidiaries, as presumed by
law? In order to answer these questions, we designed a laboratory experi-
ment in which a non-producing parent firm sets intra-firm incentives to
coordinate its producing subsidiaries by redistributing profits.
4
We study
the intra-firm coordination problem in an unambiguous way and isolate
the effects of endogenously determined incentives: Subsidiaries of a
parent firm operate in a Cournot oligopoly excluding other competitors.
We find that almost all parent firms converge to a specific incentive
scheme, mainly to one of two simple profit-sharing rules: proportional and
equal profit sharing. Subsidiaries operating under equal profit sharing r ules
are able to collude, whereas subsidiaries operating under proportional profit
sharing generate profits close to the Cournot level. Our results show that the
prediction of perfect cooperation between subsidiary firms belonging to the
same owner might be too restrictive. Only around half of the firms in our
experiment collude. The other half of firms instead maintain Cournot com-
petition between their subsidiaries.
3
Guidelines on the Assessment of Horizontal Mergers Under the Council Regulation on the
Control of Concentrations Between Undertakings, 2004 O.J. (C 31) 5, 5 4 (EC).
4
This hierarchical division of owners (parent firms) and decision-makers (producing
subsidiaries) also relates our work to a study on strategic delegation in a Cournot duopoly by
Steffen Huck, Wieland Mu
¨ller & Hans-Theo Normann, Strategic Delegation in Experimental
Markets,22I
NT’LJ. INDUS.ORG.561 (2004).
168 Journal of Competition Law & Economics
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