DP732 Inefficient Diversification in Multimarket Oligopoly with Diseconomies of Scope

Author(s): Huw David Dixon
Publication Date: November 1992
Keyword(s): Diseconomies of Scope, Diversification, Oligopoly
JEL(s): D24, D43, D61
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=732

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.