Diversification and Market Structure

• Published date: 01 December 1979
• Author: Roger E. Alcaly
• Date: 01 December 1979
• DOI: 10.1177/0003603X7902400403
• Subject Matter: Article

The Antitrust Bulletin/Winter 1979

DIVERSIFICATION

AND

MARKET

STRUCTURE

by

ROGER

E. ALCALY*

The impressive growth and diversification of major Ameri-

can corporations during the postwar period has raised a num-

ber of important issues for economists and regulatory and

antitrust authorities. To a large extent these questions have

arisen because the major concern of both antitrust law and

economic analysis has been the degree of competition in indi-

vidual markets. But the emerging pattern of corporate expan-

sion is not analyzed easily within the traditional horizontal

framework.

This is not to say

that

the assessment of competition

within individual markets is straightforward and unambigu-

ous.' Nor is it to say

that

existing theoretical tools and meth-

*FederalReserve Bank of New York and Council on Wage and

Price Stability.

1Measurement problems aside, for example, there is considerable

uncertainty about the levels at which market concentration is likely

to lead to anticompetitive behavior. More generally, there is the

unresolved question of whether large firm sizes and industry concen-

tration arise, and lead to greater profitability, because of greater

efficiency and superior competitive performance or collusion. For a

useful summary of the issues, evidenceand policy implications of this

debate see P. Asch, "Industrial Concentration, Efficiency and Anti-

trust Reform," Antitrust Bulletin, Spring 1977, 22, pp. 129-143. For

an attempt to distinguish between the collusion and efficiency in-

terpretations of the profits-concentration relationship in banking, see

R.E.

Alcaly, S. Taddesse and S.R. Weisbrod, "Concentration in Local

Banking Markets: Efficiency or Collusion?" paper presented at the

Conference on Bank Structure and Competition, Federal Reserve

©1980 by Federal Legal Publications. Inc.

769

770 THE ANTITRUST BULLETIN

odology are inappropriate for analyzing the economic effects of

large corporate size and diversified operations. Recent discus-

sions and evaluations of competitive conditions, however, have

been concerned with how precisely to incorporate variables like

firm size and diversification within existing theoretical struc-

tures, or with how to broaden those structures to include the

political and social implications of recent corporate growth and

development.2

As is so often the case, the impediments to such efforts

have turned out to be empirical as much as theoretical. Berry,

for example,

put

it this way:

...

the term "diversification" without further qualification

means little. Firms may diversify with various conse-

quences. The essential questions relate to what the impli-

cations of

that

diversification are in terms of market

structure, and in the way

that

market structure is itself

defined. The largest industrial corporations in the United

States are both relatively larger and more diversified than

they were twenty years ago.

It

is not clear, however, what

kind of diversification has been related to this relative

growth by large corporations.

It

is quite possible

that

diversification and growth indicate an increasing degree

of effective inter-industry competition among those (and

other) firms; it is also possible

that

they reflect chiefly an

increasing consolidation of market power within relatively

few large firms. But no evidence in either direction is

provided by the finding

that

large firms are relatively

larger and more diversified."

Bank of Chicago, May 3-4, 1979; to appear in the Conference Pro-

ceedings. See also notes 14-16 infra and the accompanying discussion

in the text.

2S.A. Rhoades, "Extending Merger Analysis Beyond the Single-

Market Framework," Staff Economic Studies (86), Board of

Gov-

ernors of the Federal Reserve System, March 1976, considers some of

the more prominent approaches

that

have been adopted.

3C.H. Berry, Corporate Growth and Diversification, Princeton

University Press, 1975, p. 38. Much of the material in this book was

first published elsewhere during the years 1967-1974.