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Diversification, Multi-market Contact and Profitability

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  • 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.

Suggested Citation

  • Hughes, Kirsty & Oughton, Christine, 1993. "Diversification, Multi-market Contact and Profitability," Economica, London School of Economics and Political Science, vol. 60(238), pages 203-224, May.
  • Handle: RePEc:bla:econom:v:60:y:1993:i:238:p:203-24
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    1. repec:eee:touman:v:48:y:2015:i:c:p:305-315 is not listed on IDEAS
    2. Pham, Tho & Talavera, Oleksandr & Yang, Junhong, 2016. "Multimarket Competition and Profitability: Evidence from Ukrainian banking," MPRA Paper 78763, University Library of Munich, Germany, revised 01 Apr 2017.
    3. Paolo Coccorese & Alfonso Pellecchia, 2009. "Multimarket Contact and Profitability in Banking: Evidence from Italy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(3), pages 245-271, June.
    4. 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.
    5. 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.
    6. Timothy L. Sorenson, 2002. "Theory And Practice In The Classroom: A Repeated Game Of Multimarket Oligopoly," Contemporary Economic Policy, Western Economic Association International, vol. 20(3), pages 316-329, July.
    7. Timothy L. Sorenson, 2007. "Credible collusion in multimarket oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 115-128.
    8. Steven Pilloff, 1999. "Does the Presence of Big Banks Influence Competition in Local Markets?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 15(3), pages 159-177, May.
    9. Hwa Ryung Lee, 2010. "Multimarket contact effect on collusion through diversification," IEW - Working Papers 501, Institute for Empirical Research in Economics - University of Zurich.
    10. Steven Pilloff, 1999. "Multimarket Contact in Banking," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 14(2), pages 163-182, March.
    11. Iqbal, Athar & Hameed, Irfan & Qadeer, Majid, 2012. "Impact of Diversification on Firms’ Performance," MPRA Paper 57240, University Library of Munich, Germany.
    12. 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.
    13. Fiona Kun Yao & Jiatao Li, 2016. "Multi-market Contact and Foreign Entry Location Decisions in China," Management International Review, Springer, vol. 56(1), pages 95-122, February.
    14. Saadet Kasman & Adnan Kasman, 2016. "Multimarket contact, market power and financial stability in the Turkish banking industry," Empirical Economics, Springer, vol. 50(2), pages 361-382, March.
    15. Degl’Innocenti, Marta & Girardone, Claudia & Torluccio, Giuseppe, 2014. "Diversification, multimarket contacts and profits in the leasing industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 231-252.
    16. 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.
    17. Lucio Fuentelsaz & Jaime GÛmez, "undated". "Multipoint Competition, Mutual Forbearance and Entry into Geographic Markets," Studies on the Spanish Economy 127, FEDEA.

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