Diversification, Multi-market Contact and Profitability

Abstract

This paper analyses the relationships between diversification, multi-market contact and industry profitability. It focuses on the link between diversification and multi-market contact to show that, when diversification establishes or increases the extent to which firms meet in more than one market, the effect of such multi-market contact is to increase the possibility that collusion emerges as an evolutionary stable strategy. As a result, multi-market contact may increase the potential for tacit collusion and so lead to higher profitability. The effects of diversification and multi-market contact on the price-cost margin and the rate of return to capital are estimated using a specially constructed new database for UK manufacturing industry in 1979. This database provides information on the diversification and multi-market contact of 418 firms across 134 manufacturing industries, thus linking firm- and industry-level data. The results show a clear positive effect of multi-market contact on industry profitability.