Inefficient Diversification in Multi-Market Oligopoly with Diseconomies of Scope

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. However, this strategic motive leads to inefficiency in production owing to diseconomies of scope. This paper shows that the welfare gain arising from increased competition is offset by the inefficiency in production, which may lead to lower welfare than in the case of pure monopoly. This is a counter-example to the contention that the diversification increases social welfare.