The name is absent

c∞perative. ɪt has no effect under customer cooperative. Although these are not entirely
surprising results, they could have important implications for antitrust policy.

We model integration of the two firms as in section IV. with the difference that instead of
having two employees in the firm we have four. The bargaining solution in the integrated
firm under outside ownership is then as before, so that employees invest kf = ʌ — 1 under
outside ownership. Similarly, under customer cooperative the bargaining solution remains
unchanged and employees invest Arf =         Finally, under employee cooperative the

bargaining solution is changed only to the extent that now four employees share the surplus
ownership provides instead of just two. Thus, under employee cooperative, employees
invest fcf =     + 2) - 1.

Comparing these investment levels to those obtained under non-intégration we can im-
mediately conclude that when there is no lock-in of customers in firms then integration is
always counterproductive from an efficiency perspective. It has no effect on investment in-
centives under customer cooperative, but it strictly decreases investment incentives under
either outside or employee cooperative. The worst impact of integration is under outside
ownership when f^, > 1.

Note, however, that if there is perfect lock-in integration could be an efficient institu-
tional response to overcome this constraint. That is. by integrating the two firms could
increase the extent of internal competition and thereby improve incentives.

CONCLUDING REMARKS

Our paper provides a uniform framework within which both competition within and
across firms can be considered. To our knowledge this is the first attempt to consider
both forms of competition within a single framework. Most of the existing literature
either deals with only internal competition or only external competition.

REFERENCES

[1] Aghion. P. and P.Bolton (1992). "An Incomplete Contract Approach to Financial Con-
tracting," Review of Economic Studies. 59(3). July 1992.

[2] Bai. C. and C.Xu :1998). "Does Employee Ownership Improve Incentives for Workers'
Effort?" mimeo. Boston College and LSE. 1998.

[3] Bolton. P. and M. Whinston (1993). "Incomplete Contracts. Vertical Integration, and
Supply Assurance." Review of Economie Studies. 60(1). Jan. 1993.

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