Managerial performance and product market competition: the hicks conjecture reconsidered

Abstract

This article analyzes the effect that product market competition has on firms’ incentives to improve their managerial performance. Product market competition is measured with the number of firms, and managerial performance with the manager’s cost-reduction effort of each firm. First, a Cournot oligopoly, in which an arbitrary number of firms compete simultaneously, is analyzed. In this framework, it is found that firms in markets with more competitors have regularly lower managerial performance. Then, the increase in product market competition is analyzed in detail by considering a Stackelberg framework in which an arbitrary number of incumbents foresee the entry of a new firm. The main result of the study is that the managers of incumbent firms increase their cost-reduction efforts in the face of the entry of a firm to the product market, whatever prior level of competition. Therefore, the conclusion points in the direction of the Hicks conjecture: firms increase their managerial performance when product market competition rises.