Abstract: This study explores the effects of a conglomerate's adverse selection on the market. The conglomerate has productions constraints, participates in two markets, and is run by its headquarters and one manager. The adverse selection arises because the manager has private information regarding the demand of one market, which the headquarters try to elicit by a contract mechanism. The adverse selection reduces the production in the market with asymmetric information. If there is an opportunity cost of production, the production in the other market is increased; otherwise it is unaffected. We find that the welfare is sometimes improved with asymmetric information. We also examine an application in a scenario with Cournot competition. We find that a low number of firms is a requirement for the welfare to improve under asymmetric information. 

Abstract: We construct a discrete-time, infinite horizon theoretical model to analyze the diversifying and divesting behavior of a monopolist. The monopolist participates in its core market and can merge by acquiring another monopolist firm in a new market. Thereafter the firm in the core market can separate from the new firm by selling it for a one-period reward. The monopolist has a stock of capital which is used to reduce the cost of production. Capital is obtained through two channels: the external capital market or with a merger. The capital stock is reduced in two ways: by depreciation or with a separation. We find an approximate solution using numerical methods. We found that the conglomerate acquires a firm and stays merged in periods where the value of the demand of the new market remains high.  In periods where the value of the demand of the new market is low, the conglomerate will merge and divest intermittently.