Thursday, June 30, 2011
Posted by D. Daniel Sokol
ABSTRACT:The impact of private benefits extraction on the values of oligopolistic firms is analyzed. Private benefits are assumed to generate costs which are passed through the organizational structure and create price distortion in the downstream product market. For a wide range of industry concentrations, we prove that this may affect the profit (i.e. the value) of the firms in a positive sense since the intensity of rivalry is curbed by the cost increase. This reduces incentive to merge in the industry; antitrust implications are therefore discussed. In oligopoly, private benefits extraction may enhance the profits while still generating a welfare loss: this suggests that corporate governance cannot be divorced from competition policy in industries where managerial opportunism generates expropriation costs.