Predation, Entry and the Diversified Firm

Authors:
David Levy
Working Paper:
171

This study examines the relationship between diversification and predation. Unlike previous analyses, the focus is placed on the role of the firm's investments in sunk cost assets. Unlike the single product firm, the diversified firm may use certain firm-specific assets that are not sunk to the product. The ability to transfer these assets among uses or locations may lower the cost and thereby encourage predation by the diversified firm. The "long-purse" and "multimarket-reputation" arguments about predation by diversified firms can be viewed as special cases of this phenomenon. Diversification may also affect the likelihood that a firm will be a target of predation. The ability of a diversified firm to transfer assets back into an industry when the predator raises price may discourage predation.