In-House Competition, Organizational Slack and the Business Cycle
41 Pages Posted: 20 Dec 2000
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In-House Competition, Organizational Slack and the Business Cycle
Abstract
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. It is shown that the amount of slack in the firm is 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 facilities even when low-cost plants are not running at capacity.
Keywords: Demand Fluctuations, Slack, Capacity, Competition
JEL Classification: D20, D82, F23, L22
Suggested Citation: Suggested Citation
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