A diversified firm will have higher profitability than its less integrated competitors only if its lower direct costs (or higher sales) can compensate for its higher fixed overhead costs.

Question

Quizplus · Accepted Answer

A diversified firm can benefit from economies of scope, which can lead to lower direct costs or higher sales. However, diversification usually involves higher fixed overhead costs for managing different business units. Therefore, the overall profitability will depend on whether the cost savings or revenue benefits of diversification can offset the higher fixed costs.

A Diversified Firm Will Have Higher Profitability Than Its Less