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Spread Too Thin: Uncertainty Shocks and Diseconomies of Scope



Although many streams of literature have recognized that firms with broader scope often underperform those with greater focus, relatively little research has examined the mechanisms that might account for these diseconomies of scope. One potential mechanism is that uncertainty shocks -- events or short-term periods that upset the normal course of business -- place unusual demands on the limited attention of managers. When managers of larger, more diverse firms allocate their time and organizational resources to address these events, they necessarily divert attention and resources away from other businesses, thereby converting these uncertainty shocks in one part of the organization to performance shocks in other parts of it. An empirical examination of the relationship between the distribution of films in theaters and videos for sale demonstrates that uncertainty shocks in theatrical distribution become performance shocks in the video market and that the magnitude of these effects increases for larger, more diversified firms.

Suggested Citation

  • Gabriel Natividad & Olav Sorenson, 2011. "Spread Too Thin: Uncertainty Shocks and Diseconomies of Scope," Working Papers 11-04, NET Institute.
  • Handle: RePEc:net:wpaper:1104

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    References listed on IDEAS

    1. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    2. Marshall L. Fisher & Christopher D. Ittner, 1999. "The Impact of Product Variety on Automobile Assembly Operations: Empirical Evidence and Simulation Analysis," Management Science, INFORMS, vol. 45(6), pages 771-786, June.
    3. Katherine Ho & Justin Ho & Julie Holland Mortimer, 2012. "The Use of Full-Line Forcing Contracts in the Video Rental Industry," American Economic Review, American Economic Association, vol. 102(2), pages 686-719, April.
    4. De Vany, Arthur S. & Walls, W. David, 2004. "Motion picture profit, the stable Paretian hypothesis, and the curse of the superstar," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1035-1057, March.
    5. Timothy van Zandt, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 633-658.
    6. Christophe, Stephen E, 1997. "Hysteresis and the Value of the U.S. Multinational Corporation," The Journal of Business, University of Chicago Press, vol. 70(3), pages 435-462, July.
    7. Ken Hendricks & Alan Sorensen, 2009. "Information and the Skewness of Music Sales," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 324-369, April.
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    More about this item


    Uncertainty shocks; organizational scope; entertainment and media industries.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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