Managerial Firms, Organizational Choice, and Consumer Welfare∗

We show that important organizational decisions — such as whether to inte-grate — undertaken by managerial firms may adversely affect consumers, even in the absence of monopoly power in supply and product markets. A key observation is that the price of output helps to determine the organizational form chosen. At low prices, managers may be resistant to integration, even if it efficiently coordinates decisions, because it imposes high privates costs on them. At higher prices, they may choose integration even if nonintegration would produce more output, because nonintegration leads to a managerially undesired distribution of private costs. Since shocks to industries affect prod-uct prices, reorganizations are likely to take place in coordinated fashion and be industry specific, consistent with the evidence. The model identifies conditions under which hostile (shareholder initiated) versus friendly (manager initiated) takeovers are more likely, and show that there are instances in which entr