Diversification, Diseconomies of Scope, and Vertical Contracting: Evidence from the Taxicab Industry

Abstract

This paper studies how firms reorganize following diversification, proposing that firms use outsourcing, or vertical disintegration, 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 microdata on taxicab and limousine fleets from the Economic Census. The results show that taxicab firms outsource, by shifting the composition of their fleets toward 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 that (1) firms use outsourcing to manage diseconomies of scope at a particular point in the value chain and (2) Boston, Massachusetts 02215, tsimcoe@bu.edu This paper studies how firms reorganize following diversification. We propose that firms use outsourcing, or vertical dis-integration, to reduce scope-induced governance costs that arise following diversification. We also consider the source of scope diseconomies, and argue that different underlying mechanisms generate contrasting predictions about the link between withinfirm 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 fleets outsource, by shifting towards owner-operator drivers, when they diversify into the limousine business. Moreover, the magnitude of this shift toward driver ownership is larger in less urban markets, where the tasks of taxicab and limousine drivers are similar, but compensation systems differ. The findings suggest that: (1) firms use outsourcing to manage diseconomies of scope; and (2) that inter-divisional conflicts are an important source of scope diseconomies in related diversification.

Relational Contracts and Collaboration in the Supply Chain: Impact of Expected Future Business Volume on the Make‐or‐Buy Decision

“…Diversification might affect the degree of vertical integration (Rawley & Simcoe, 2010). We measured the degree of diversification by calculating the HHI (Nayyar, 1992), which we computed as the sum of the squares of the share of each project type in the total square meters built by the contractor for each year of the sample.…”

Entrepreneurship, innovation, and political competition: How the public sector helps the sharing economy create value

“…In most cases, city ordinances, which are typically approved and signed by the mayor after the city council deliberates on new proposals, regulate the local taxicab industry. Regulation is enacted with the intention of achieving various social goals including promoting public safety, reducing accident rates, curtailing air pollution, avoiding a painful level of road congestion, preventing consumer exploitation, securing proper level of insurance coverage, and so on, that would not otherwise be achieved by implementing many rules, such as fingerprint background checks for screening taxi drivers, mandatory driver safety training, regular automobile safety and maintenance inspections, having a limited number of taxicabs (e.g., medallion system), fixed‐fare pricing using a predictable formula, and adequate commercial‐grade insurance (Cairns & Liston‐Heyes, ; Rawley & Simcoe, , ; Shreiber, ). Accordingly, taxicab companies have complained that, despite competing for the same customers, ridesharing companies represented unfair competition as the companies and their driver‐partners were not abiding by the same regulations, and thus, enjoyed lower costs (Lien, ; Pathe, )…”

When to buy or sell in supply chains with the presence of mergers

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