Private Benefits and Product Market Competition

The impact of private benefits extraction on the values of oligopolistic firms is analyzed. Private benefits are assumed to generate costs which are passed through the organizational structure and create price distortion in the downstream product market. We prove that this may affect the profit (i.e. the market value) of the firms in a positive sense since the intensity of rivalry is curbed by the cost increase. In oligopoly, private benefits extraction may enhance the profits while still generating a welfare loss: this suggests that corporate governance cannot be divorced from competition policy in industries where managerial opportunism generates expropriation costs. JEL Classification: G38, D43.