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, which enable them to enter technologically related markets, thereby increasing competition. This strategic motive leads to inefficiency in production, however, due to diseconomies of scope. This paper shows that the welfare gain from increased competition can be more than offset by the inefficiency in production, which may lead to lower welfare than in the case of pure monopoly.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
732.
Find related papers by JEL classification: D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor 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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