Paper #232

Title:

A model of conglomeration and synergy traps

Authors:

M. Àngels Oliva and Luis Rivera-Bátiz

Date:

August 1997

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

JEL codes:

C78, F23, G34, O32

Area of Research:

Finance and Accounting

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