Capability Accumulation and Conglomeratization in the Information Age

54 Pages Posted: 23 Mar 2016 Last revised: 20 Jul 2020

See all articles by Jun Chen

Jun Chen

Renmin University of China

Matthew Elliott

Cambridge University

Andrew Koh

University of Cambridge

Date Written: July 18, 2020

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

Suggested Citation

Chen, Jun and Elliott, Matthew and Koh, Andrew, Capability Accumulation and Conglomeratization in the Information Age (July 18, 2020). Available at SSRN: https://ssrn.com/abstract=2753566 or http://dx.doi.org/10.2139/ssrn.2753566

Jun Chen

Renmin University of China ( email )

Beijing
China

Matthew Elliott (Contact Author)

Cambridge University ( email )

Faculty of Economics
Austin Robinson Building Sidgwick Avenue
Cambridge, CB39DD
United Kingdom

Andrew Koh

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

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