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Diversification, Diseconomies of Scope, and Vertical Contracting: Evidence from the Taxicab Industry

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  • Evan Rawley

    () (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Timothy S. Simcoe

    () (Boston University School of Management, Boston, Massachusetts 02215)

Abstract

This paper studies how firms reorganize following diversification, proposing that firms use outsourcing, or vertical disintegration, to manage diseconomies of scope. We also consider the origins of scope diseconomies, showing how different underlying mechanisms generate contrasting predictions about the link between within-firm task heterogeneity and the incentive to outsource following diversification. We test these propositions using microdata on taxicab and limousine fleets from the Economic Census. The results show that taxicab firms outsource, by shifting the composition of their fleets toward owner-operator drivers, when they diversify into the limousine business. The magnitude of the shift toward driver ownership is larger in less urban markets, where the tasks performed by taxicab and limousine drivers are more similar. These findings suggest that (1) firms use outsourcing to manage diseconomies of scope at a particular point in the value chain and (2) interagent conflicts can be an important source of scope diseconomies.

Suggested Citation

  • Evan Rawley & Timothy S. Simcoe, 2010. "Diversification, Diseconomies of Scope, and Vertical Contracting: Evidence from the Taxicab Industry," Management Science, INFORMS, vol. 56(9), pages 1534-1550, September.
  • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:9:p:1534-1550
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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1207
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Eder, Andreas, 2017. "Cost efficiency and economies of diversification of biogas-fuelled cogeneration plants in Austria: a nonparametric approach," MPRA Paper 80369, University Library of Munich, Germany.
    2. Wang, Xunxiao & Wu, Chongfeng & Xu, Weidong, 2015. "When to buy or sell in supply chains with the presence of mergers," International Journal of Production Economics, Elsevier, vol. 163(C), pages 137-145.
    3. Peng, Mike W. & Su, Weichieh, 2014. "Cross-listing and the scope of the firm," Journal of World Business, Elsevier, vol. 49(1), pages 42-50.
    4. Hess, Sebastian, 2011. "Outsourcing, Regional Trade and Specialization: An Application to in the German Pig Sector," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114537, European Association of Agricultural Economists.
    5. Brandon Pope & Andrew Johnson, 2013. "Returns to scope: a metric for production synergies demonstrated for hospital production," Journal of Productivity Analysis, Springer, vol. 40(2), pages 239-250, October.
    6. Hess, Sebastian, 2011. "Outsourcing Decisions Of Pig Producers In Baden-Württemberg," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114509, German Association of Agricultural Economists (GEWISOLA).
    7. Huang, Tai-Hsin & Lin, Chung-I & Chen, Kuan-Chen, 2017. "Evaluating efficiencies of Chinese commercial banks in the context of stochastic multistage technologies," Pacific-Basin Finance Journal, Elsevier, vol. 41(C), pages 93-110.
    8. Lamar Pierce, 2012. "Organizational Structure and the Limits of Knowledge Sharing: Incentive Conflict and Agency in Car Leasing," Management Science, INFORMS, pages 1106-1121.

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