Capability Accumulation and Conglomeratization in the Information Age

Abstract

The past twenty years have witnessed the emergence of internet conglomerates fueled by acquisitions. We provide a simple theoretical model to shed some light on this. Following a large literature in management (Wernerfelt, 1984) we endow firms with a set of scarce competencies which drive their competitiveness across markets. Firms can merge to combine their competencies, spin-off new firms by partitioning their competencies, or procure unassigned competencies. We study stable industry structures, in which there are no profitable mergers, demergers, or procurements, and find an upper and lower bound on the size of the largest firm. As markets increasingly value more of the same competencies, abrupt transitions in these bounds occur. We posit that this force can help explain the sudden conglomeratization of internet companies.

JEL Classification: D40, D85, L10