A model of conglomeration and synergy traps

M. Àngels Oliva and Luis Rivera-Batiz

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We present a model of conglomeration motivated by technology synergies and strategic reductions in variable costs in the face of competitive pressures. The resulting firm integration is neither horizontal nor vertical but rather congeneric integration of firms in related industries. We endogenize the industrial conglomeration structure and examine the effects of competition between conglomerates, and between a conglomerate and independent firms. We show that there is an equilibrium synergy trap in which conglomerates are formed to exploit economies of scope, but resulting profits are lower than under the status quo. We also show that strategic firm integration can occur even in the presence of diseconomies of scope. The model helps to explain features of recent mergers and acquisitions experience.

Keywords: Conglomerate; integration; synergy; strategy (search for similar items in EconPapers)
JEL-codes: C78 F23 G34 O32 (search for similar items in EconPapers)
Date: 1997-08
New Economics Papers: this item is included in nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:232

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