Diversification, Diseconomies of Scope and Vertical Contracting: Evidence from the Taxicab Industry
Coauthor(s): Timothy Simcoe.
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This paper studies how firms reorganize following diversification, proposing that firms use
outsourcing, or vertical dis-integration, to manage diseconomies of scope. We also consider the
origins of scope diseconomies, showing how different underlying mechanisms generate
contrasting predictions about the link between within-firm task heterogeneity and the incentive to
outsource following diversification. We test these propositions using micro-data on taxicab and
limousine fleets from the Economic Census. The results show that taxicab firms outsource, by
shifting the composition of their fleets towards owner-operator drivers, when they diversify into
the limousine business. The magnitude of the shift toward driver ownership is larger in less urban
markets, where the tasks performed by taxicab and limousine drivers are more similar. These
findings suggest: (1) firms use outsourcing to manage diseconomies of scope at a particular point
in the value chain and (2) inter-agent conflicts can be an important source of scope diseconomies.
Source: Management Science
Rawley, Evan, and Timothy Simcoe. "Diversification, Diseconomies of Scope and Vertical Contracting: Evidence from the Taxicab Industry." Management Science 55, no. 9 (2010): 1534-1550.