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Concept
Economies of scope
Summary
Economies of scope are "efficiencies formed by variety, not volume" (the latter concept is "economies of scale"). In economics, "economies" is synonymous with cost savings and "scope" is synonymous with broadening production/services through diversified products. Economies of scope is an economic theory stating that average total cost of production decrease as a result of increasing the number of different goods produced. For example, a gas station that sells gasoline can sell soda, milk, baked goods, etc. through their customer service representatives and thus gasoline companies achieve economies of scope.
The term and the concept's development are attributed to economists John C. Panzar and Robert D. Willig (1977, 1981).
Whereas economies of scale for a firm involve reductions in the average cost (cost per unit) arising from increasing the scale of production for a single product type, economies of scope involve lowering average cost by producing more types of products.
Economies of scope make product diversification, as part of the Ansoff Matrix, efficient if they are based on the common and recurrent use of proprietary know-how or on an indivisible physical asset. For example, as the number of products promoted is increased, more people can be reached per unit of money spent. At some point, however, additional advertising expenditure on new products may become less effective (an example of diseconomies of scope). Related examples include distribution of different types of products, product bundling, product lining, and family branding.
Economies of scope exist whenever the total cost of producing two different products or services (X and Y) is lower when a single firm instead of two separate firms produces by themselves.
The degree of economies of scope formula is as follows:
If , there is economies of scope. It is recommended that two firms can corporate and produce together.
If , there is no economies of scale and economies of scope.
If , there is diseconomies of scope. It is not recommended for the two firms to work together.
Official source
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