Inefficient Diversification in Multi-market Oligopoly with Diseconomies of Scope
AbstractThis paper considers the incentives of oligopolistic firms to diversify into technologically related markets when there are diseconomies of scope. There is a rent extraction incentive for firms to adopt flexible technologies that enable them to enter technologically related markets, thereby increasing competition. However, this strategic motive leads to inefficiency in production owing to diseconomies of scope. This paper shows that the welfare gain arising from increased competition is offset by the inefficiency in production, which may lead to lower welfare than in the case of pure monopoly. This is a counterexample to the contention that the diversification increases social welfare. Copyright 1994 by The London School of Economics and Political Science.
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Bibliographic InfoArticle provided by London School of Economics and Political Science in its journal Economica.
Volume (Year): 61 (1994)
Issue (Month): 242 (May)
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Other versions of this item:
- Dixon, Huw David, 1992. "Inefficient Diversification in Multimarket Oligopoly with Diseconomies of Scope," CEPR Discussion Papers 732, C.E.P.R. Discussion Papers.
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
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- Alessandro Sembenelli & Davide Vannoni, 2001. "Market Structures with Multi-product Firms: Welfare Analysis and Policy Implications," Journal of Industry, Competition and Trade, Springer, vol. 1(2), pages 161-179, June.
- Neubauer, Silke, 1999. "Multimarket contact, collusion and the internal structure of firms," Discussion Papers, Research Unit: Market Dynamics FS IV 99-25, Social Science Research Center Berlin (WZB).
- L. Colombo & P. Labrecciosa & L. Lambertini, 2005. "A Chicken Game of Intraindustry Trade," Working Papers 548, Dipartimento Scienze Economiche, Universita' di Bologna.
- Neubauer, Silke, 1997. "The consequences of endogenous timing for diversification strategies of multimarket firms," Discussion Papers, various Research Units FS IV 97-34, Social Science Research Center Berlin (WZB).
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