Working Paper: CEPR ID: DP732
Authors: Huw David Dixon
Abstract: 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.
Keywords: Diseconomies of scope; Oligopoly; Diversification
JEL Codes: D24; D43; D61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| oligopoly market structure (D43) | incentive for firms to diversify (L21) |
| incentive for firms to diversify (L21) | increased competition (L13) |
| increased competition (L13) | production inefficiencies (D24) |
| production inefficiencies (D24) | net decrease in welfare (I38) |
| flexible technology adoption (O33) | higher marginal costs due to inefficiencies (D61) |
| diseconomies of scope (L25) | production inefficiencies (D24) |