Montgomery (1994) - Corporate Diversification

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Reference(s)

• Montgomery, C. (1994), "Corporate diversification", Journal of Economic Perspectives, 8, pp.163-178. pdf

Abstract

In most models offered to introductory and even intermediate students of economics, firms are homogeneous producers of single products. This abstraction has a powerful impact on the way we think about economic behavior: firms in an industry look like one another and management, who by definition is located at the business (as opposed to the corporate level), makes decisions without regard to the firm's participation in other markets. While economic science has become increasingly sophisticated within these confines, the tools and models that have made it easier for us to address homogeneous single product firms have painted a picture that excludes large diversified corporations. In 1992, the 500 largest U.S. public companies sold $3.7 trillion worth of goods and services, or approximately 75 percent of the output of all U.S. public companies. While the popular press and some researchers have highlighted recent divestiture activity among these firms, claiming a "return to the core," some changes at the margin must not obscure the fact that these firms remain remarkably diversified.