When Does Coordination Require Centralization?
Each division has a manager who is informed of his or her department's operating conditions but not those of the other. Both managers would like to maximize profits, but each values his or her own division's profits more than those of the other. In other words, both managers are biased toward their own division. Both division managers report to a superior (vertical communication), who, after receiving their reports, makes decisions for both departments to try to maximize the profits of the firm as a whole.