Diversification and Economies of Scope: A Theory of the Multiproduct Firm

139 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1984.Recent theoretical studies of multiproduct firms discuss such firms from the viewpoint that they already exist. One topic that is missing from the theory of multiproduct firms is how they came into being. This dissertation puts forth a theory of diversification which seeks to explain how multiproduct firms evolve subject to growth constraints. Here diversification refers to any movement away from the firm's main line of business, whether the movement be product extension, vertical, or conglomerate in nature. A dynamic model is examined which describes the growth and diversification behavior of a profit maximizing firm seeking to exploit available scale and scope economies.Several testable implications are derived from the model which seek to explain related and conglomerate diversification. These hypotheses are tested using merger data by logit regression analysis.It was found that mergers involving firms in related industries were positively influenced by recent firm and industry growth, the technical progressiveness of the acquiring firm, and the desire of the firm to increase cost efficiency. Negative influences on related mergers were the market share of the acquiring firm and the concentration level of the acquiring firm's industry. Conglomerate mergers in our sample were negatively related to recent firm and industry growth, and positively related to market share, concentration, size of the firm, and proxies which measured the extent of scope economies already exploited by the firm. Competing hypotheses involving other incentives of conglomerate merge (e.g., stabilize cash flows) were not significant in our analysis.A switching of regimes regression was also estimated to seek a critical concentration ratio above which the antitrust authorities will hinder further growth into related industries via merger. In general, the results were in agreement with the 1982 Merger Guidelines, though surprisingly no significant switch point was found when only horizontal mergers were examined.U of I OnlyRestricted to the U of I community idenfinitely during batch ingest of legacy ETD