In-House Competition, Organizational Slack and the Business Cycle

41 Pages Posted: 20 Dec 2000

See all articles by Rudolf Kerschbamer

Rudolf Kerschbamer

University of Innsbruck; Centre for Economic Policy Research (CEPR)

Yanni Tournas

Newark College of Arts & Sciences - Department of Economics

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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

Kerschbamer, Rudolf and Tournas, Yanni, In-House Competition, Organizational Slack and the Business Cycle. Available at SSRN: https://ssrn.com/abstract=249748 or http://dx.doi.org/10.2139/ssrn.249748

Rudolf Kerschbamer (Contact Author)

University of Innsbruck ( email )

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Centre for Economic Policy Research (CEPR)

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Yanni Tournas

Newark College of Arts & Sciences - Department of Economics ( email )

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