We present a model of conglomeration motivated by technology synergies and strategic reductions in variable costs in the face of competitive pressures. The resulting firm integration is neither horizontal nor vertical but rather congeneric integration of firms in related industries. We endogenize the industrial conglomeration structure and examine the effects of competition between conglomerates, and between a conglomerate and independent firms. We show that there is an equilibrium synergy trap in which conglomerates are formed to exploit economies of scope, but resulting profits are lower than under the status quo. We also show that strategic firm integration can occur even in the presence of diseconomies of scope. The model helps to explain features of recent mergers and acquisitions experience.
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
232.
Find related papers by JEL classification: C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
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