Capability Accumulation and Conglomeratization in the Information Age

Abstract

The past twenty years have witnessed the emergence of internet conglomerates fueled by acquisitions. We build a simple model of network formation to study this. Following the resource-based view of competitive advantage from the management literature we endow firms with scarce capabilities which drive their competitiveness across markets. Firms can merge to combine their capabilities, spin-off new firms by partitioning their capabilities, or procure unassigned capabilities. We study stable industry structures (stable networks) in which none of these deviations are profitable. We find an upper and lower bound on the size of the largest firm, and show that as markets value more of the same capabilities abrupt increases in these bounds occur.

JEL Classification: D40, D85, L10