Diversification is the act of investing in a variety of different industries, areas, and

financial instruments, in order to reduce the risk that all the investments will drop in price
at the same time.
diversification is the process of allocating capital in a way that reduces the exposure to
any one particular asset or risk. A common path toward diversification is to reduce risk or
volatility by investing in a variety of assets.
 Different types of diversification strategies
There are several different types of diversification:
Horizontal diversification
Horizontal diversification is when you acquire or develop new products or services that
are complementary to your core business and appeal to your current customers.
Concentric diversification
Concentric diversification involves adding new products that have technological or
marketing synergies with existing product lines or industries, but appeal to new
customers. Conglomerate diversification
Conglomerate diversification occurs when you add new products or services that are
entirely different from and unrelated to your core business.
Vertical diversification
Vertical diversification or integration is when you expand in a backward or forward
direction along the production chain of your product. In this approach, you may control
more than one stage of the supply chain.

 Implications for public policy

We may take four different possibilities for such an integration,
1. Wholeseller is a competitor and retailer is also a competitor,
2. Wholeseller is a competitor but retailer is a monopolist,
3. Wholeseller is a monopolist but retailer is a competitor,
4. Wholeseller is a monopolist and the retailer is also a monopolist.
Case 1: When both the wholeseller and the retailer are competitive operate under
perfect competition, there will be no effect on market price of milk as Pw = MCr = Pr =
$1.5. Profit will be zero.
Case 2: When the wholeseller is a competitor and the retailer is a monopolist, the
analysis can be explained through a graph.
Dr in Fig. 8.2 shows the, downward sloping demand curve for the monopolist retailer.
MRr is associated marginal revenue curve for the retailer MCr which is equal to Pw is the
marginal cost curve for the retailer. The equilibrium for the retailer will be at that level of
milk supply to consumers ie M*C_{R} = M*R_{R} as shown at point. E.
 Fig. 8.2 Vertical integration between a competitor and a
monopolist
The profit of the retailer will be P. B, E, P with P as retailer's price Q_{x} as retailer's
quantity of milk sold to consumers, when the two suppliers integrate, the price P_{p} will
prevail in the market, the wholeseller being a competitor will not affect it.
Case 3: Let us take the situation when the wholeseller is a monopolist but the retailer is a
competitor. In Fig. 8.3. the downward sloping market demand curve for the retailer will
also be the demand curve for the wholeseller. The retailer is a competitor; he will sell
milk to consumer at the wholesale price Pw
The equilibrium of the wholeseler is at point C curve where

Fig. 8.3 Vertical integration between a monopolist and a competitor

MC H' =MR H^ prime This gives P_{W} :=P R as price of milk d*P_{0} BCD as profits to the
wholeseller.When the two suppliers integrate, there will be no effect on the equilibrium
price as in the case (2),
Case 4: Both, the wholeseller and the retailer are monopolist..

fig: 8.4 Vertical integration between two monopolist

Dr is the demand curve for the retailer and M*R_{R} is the associated marginal revenue
curve for the retailer. The monopolist retailer takes the decision on the basis of its
marginal revenue curve M*R_{R} Thewholeseller knows this. He will take this as his
relevant demand curve i.c. M*k_{R} = D_{H} The associated marginal revenue curve for
the wholeseller is M*R_{W}
For profit maximization, the monopolist wholesaler will be in equilibrium at point F
where MR W' =MC Wand so his price would be P Ir and profits would be GFDP P would be
retailer marginal cost. So he will be in equilibrium when tilde M*R_{g} = M*C_{g} H^ n j.
, at point D correspondingly P_{g} is the retail price and P_{H}*DB*R_{4}as profits.
The consumer surplus is ∆ABP{R}
Now, the two monopolists integrate: M*C_{H} will be the relevant marginal cost for the
integrated firm, and D. would be the relevant demand curve.
The equilibrium would be at point E where M*R_{R} :=M dot M C W .P H is the price (it is
a coincidence here, it may be more or less than P_{H} normally more than P_{H}*bu less
dot than*P_{R} ) and the profit of the integrated firm would be P_{n}*CEG
We can compare the results of the two situations without and with integration combined
profit of the two sellers when they were not integrated is P_{K}*BFG and consumer
surplus is the area of Delta*AB*P_{o}
On integration combined profit is P K . CEG . and consumer surplus is ∆ACP
We find Delta*AC P RT > Delta ABP g i.e. more consumer surplus on integration.
Integrated profit Ph CEG>P R BFG as DCEF> PBDP price on integration is less than P{R}
These results show that vertical integration between the two monopolist suppliers leads
to more profits for the integrated firm, less price for consumer, more consumer surplus
(i.e. welfare) and more output for consumer. This is a happy situation for both the sellers
and the market.