The Diversification–Market Power Nexus: An Integrative Theoretical Framework

Abstract

Diversification is widely recognized as one of the most important corporate growth strategies for improving organizational performance and reducing business risk. However, its contribution to market power remains insufficiently integrated within the strategic management literature. This paper develops a theoretical framework explaining how diversification strengthens firms' market power through complementary strategic mechanisms. Based on a systematic review of the literature in industrial organization, the resource-based view, transaction cost economics, dynamic capabilities, and business ecosystem theory, the study proposes an integrative conceptual model linking diversification strategies to the development of sustainable competitive advantage.
The analysis shows that related and unrelated diversification reinforce market power through four principal mechanisms: value chain control achieved through vertical integration; the creation of entry barriers through economies of scale and strategic assets; organizational synergies generated by resource sharing and knowledge integration; and conglomerate power resulting from internal capital allocation, cross-subsidization, and multi-market operations. Dynamic capabilities are positioned as a transversal condition that activates and sustains these mechanisms, particularly in contemporary digital economies where market power increasingly depends on firms' ability to orchestrate tangible and intangible resources and coordinate business ecosystems, rather than on market concentration alone.
The proposed framework contributes to strategic management theory by integrating previously fragmented perspectives into a coherent explanation of the diversification–market power relationship, and it offers practical guidance for managers designing diversification strategies that build sustainable advantage while remaining consistent with competitive and regulatory requirements. Five theoretical propositions are formulated to guide future empirical validation across industries and institutional contexts, particularly in emerging economies.