Economies of Scope
Economies of scope are the cost advantages that a firm obtains by producing a wider variety of products or services, rather than specialising in a single product. They exist when the cost of producing two or more products jointly is lower than the cost of producing them separately.[1]
Definition
Economies of scope can be expressed formally as a situation in which:
- C(X, Y) < C(X, 0) + C(0, Y)
where C(X, Y) is the cost of producing goods X and Y together, and C(X, 0) and C(0, Y) are the costs of producing each separately. When the joint cost is lower, economies of scope exist.[1]
Comparison with economies of scale
| Concept | Description |
|---|---|
| Economies of scale | Cost advantages from producing more of the same product. |
| Economies of scope | Cost advantages from producing different products together. |
The two concepts are related but distinct: economies of scale concern volume, while economies of scope concern variety.[1]
Sources
Economies of scope commonly arise from:
- Shared inputs — common facilities, equipment, or raw materials used across products.
- Shared expertise — skills and research that can be applied to multiple products.
- Shared brand and distribution — a common brand or logistics network used for many products.
- Complementary production — processes that produce multiple outputs jointly, such as joint products.
Applications
Economies of scope help explain corporate diversification, the growth of multi-product firms, and the strategy of firms that leverage a core competence across many markets. They are also relevant to the analysis of mergers and to the design of industrial policy.[1]