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Diversification, Multi-market Contact and Profitability

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Author Info

  • Hughes, Kirsty
  • Oughton, Christine

Abstract

This paper analyzes the relationship between diversification, multi-market contact and industry profitability. It focuses on the link between diversification and multi-market contact to show that, when diversification establishes or increases the extent to which firms meet in more than one market, the effect of such multi-market contact is to increase the possibility that collusion emerges as an evolutionary stable strategy. As a result, multi-market contact may increase the potential for tacit collusion and so lead to higher profitability. The effects of diversification and multi-market contact on the price-cost margin and the rate of return to capital are estimated using a specially constructed new database for U.K. manufacturing industry in 1979. This database provides information on the diversification and multi-market contact of 418 firms across 134 manufacturing industries, thus linking firm- and industry-level data. The results show a clear positive effect of multi-market contact on industry profitability. Copyright 1993 by The London School of Economics and Political Science.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 60 (1993)
Issue (Month): 238 (May)
Pages: 203-24

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Handle: RePEc:bla:econom:v:60:y:1993:i:238:p:203-24

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Cited by:
  1. Hwa Ryung Lee, 2010. "Multimarket contact effect on collusion through diversification," IEW - Working Papers 501, Institute for Empirical Research in Economics - University of Zurich.
  2. Coccorese, Paolo & Pellecchia, Alfonso, 2013. "Multimarket contact, competition and pricing in banking," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 187-214.
  3. Timothy L. Sorenson, 2007. "Credible collusion in multimarket oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 115-128.
  4. Vassilis Droucopoulos & Theodore Papadogonas, 1999. "'Stick to the knitting' vs. 'the mysteriously potent charm of diversification': the Greek evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(4), pages 217-227.
  5. Lucio Fuentelsaz & Jaime Gómez, . "Multipoint Competition, Mutual Forbearance and Entry into Geographic Markets," Studies on the Spanish Economy 127, FEDEA.
  6. Steven Pilloff, 1999. "Does the Presence of Big Banks Influence Competition in Local Markets?," Journal of Financial Services Research, Springer, vol. 15(3), pages 159-177, May.
  7. Upson, John W. & Ranft, Annette L., 2010. "When strategies collide: Divergent multipoint strategies within competitive triads," Business Horizons, Elsevier, vol. 53(1), pages 49-57, January.
  8. Paolo Coccorese & Alfonso Pellecchia, 2009. "Multimarket Contact and Profitability in Banking: Evidence from Italy," Journal of Financial Services Research, Springer, vol. 35(3), pages 245-271, June.
  9. Jans, Ivette & Rosenbaum, David I., 1997. "Multimarket contact and pricing: Evidence from the U.S. cement industry," International Journal of Industrial Organization, Elsevier, vol. 15(3), pages 391-412, May.
  10. Steven Pilloff, 1999. "Multimarket Contact in Banking," Review of Industrial Organization, Springer, vol. 14(2), pages 163-182, March.

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