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Inefficient Diversification in Multi-market Oligopoly with Diseconomies of Scope

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  • Dixon, Huw David

Abstract

This 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 Info

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

Volume (Year): 61 (1994)
Issue (Month): 242 (May)
Pages: 213-19

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Handle: RePEc:bla:econom:v:61:y:1994:i:242:p:213-19

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Cited by:
  1. Nachum, Lilach, 1999. "Diversification strategies of developing country firms," Journal of International Management, Elsevier, vol. 5(2), pages 115-140.
  2. 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).
  3. 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).
  4. Lucas Navarro, 2008. "Plant Level Evidence on Product Mix Changes in Chilean Manufacturing," ILADES-Georgetown University Working Papers inv210, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  5. Neubauer, Silke, 1997. "Interdivisional information sharing: the strategic advantage of knowing nothing," Discussion Papers, Research Unit: Market Dynamics FS IV 97-33, Social Science Research Center Berlin (WZB).
  6. 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.
  7. L. Colombo & P. Labrecciosa & L. Lambertini, 2005. "A Chicken Game of Intraindustry Trade," Working Papers 548, Dipartimento Scienze Economiche, Universita' di Bologna.

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