Economies of scope
Encyclopedia
Economies of scope are conceptually similar to economies of scale
. Whereas 'economies of scale' for a firm primarily refers to reductions in average cost
(cost per unit) associated with increasing the scale of production for a single product type, 'economies of scope' refers to lowering average cost
for a firm in producing two or more products. The term and concept development are due to Panzar and Willig (1977, 1981). • _____ (1981). "Economies of Scope," American Economic Review, 71(2), 71(2), pp. 268-272. The 1981 paper gave a precise definition. Here, economies of scope make product diversification 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 dollar spent. At some point, additional advertising
expenditure on new products may start to be less effective (an example of diseconomies of scope). Related examples and distribution
of different types of products
, product bundling
, product lining
, and family branding
.
If a sales force is selling several products they can often do so more efficiently than if they are selling only one product. The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. There can also be synergies
between products such that offering a complete range of products gives the consumer a more desirable product offering than a single product would. Economies of scope can also operate through distribution efficiencies. It can be more efficient to ship a range of products to any given location than to ship a single type of product to that location.
Further economies of scope occur when there are cost-savings arising from by-products in the production process. An example would be the benefits of heating from energy production having a positive effect on agricultural yields.
A company which sells many product lines, sells the same product in many countries, or sells many product lines in many countries will benefit from reduced risk levels as a result of its economies of scope. If one of its product lines falls out of fashion or one country has an economic slowdown, the company will, most likely, be able to continue trading.
Not all economists agree on the importance of economies of scope. Some argue that it only applies to certain industries
, and then only rarely.
, in the multi-output case, they are neither necessary nor sufficient. Economies of scope are, however, a necessary condition.
As a matter of simplification, it is generally accepted that, should economies of scale and of scope both apply, as well as sunk costs or other entry barriers, then markets may have monopoly features.
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
. Whereas 'economies of scale' for a firm primarily refers to reductions in average cost
Average cost
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced . It is also equal to the sum of average variable costs plus average fixed costs...
(cost per unit) associated with increasing the scale of production for a single product type, 'economies of scope' refers to lowering average cost
Average cost
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced . It is also equal to the sum of average variable costs plus average fixed costs...
for a firm in producing two or more products. The term and concept development are due to Panzar and Willig (1977, 1981). • _____ (1981). "Economies of Scope," American Economic Review, 71(2), 71(2), pp. 268-272. The 1981 paper gave a precise definition. Here, economies of scope make product diversification 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 dollar spent. At some point, additional advertising
Advertising
Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...
expenditure on new products may start to be less effective (an example of diseconomies of scope). Related examples and distribution
Distribution (business)
Product distribution is one of the four elements of the marketing mix. An organization or set of organizations involved in the process of making a product or service available for use or consumption by a consumer or business user.The other three parts of the marketing mix are product, pricing,...
of different types of products
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
, product bundling
Product bundling
Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business , in the cable television industry Product bundling is a marketing strategy that involves offering several products for sale as...
, product lining
Product lining
Product lining is the marketing strategy of offering for sale several related products. Unlike product bundling, where several products are combined into one, lining involves offering several related products individually. A line can comprise related products of various sizes, types, colors,...
, and family branding
Family branding
Family branding is a marketing strategy that involves selling several related products under one brand name. Family branding is also known as umbrella branding...
.
If a sales force is selling several products they can often do so more efficiently than if they are selling only one product. The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. There can also be synergies
Synergy
Synergy may be defined as two or more things functioning together to produce a result not independently obtainable.The term synergy comes from the Greek word from , , meaning "working together".-Definitions and usages:...
between products such that offering a complete range of products gives the consumer a more desirable product offering than a single product would. Economies of scope can also operate through distribution efficiencies. It can be more efficient to ship a range of products to any given location than to ship a single type of product to that location.
Further economies of scope occur when there are cost-savings arising from by-products in the production process. An example would be the benefits of heating from energy production having a positive effect on agricultural yields.
A company which sells many product lines, sells the same product in many countries, or sells many product lines in many countries will benefit from reduced risk levels as a result of its economies of scope. If one of its product lines falls out of fashion or one country has an economic slowdown, the company will, most likely, be able to continue trading.
Not all economists agree on the importance of economies of scope. Some argue that it only applies to certain industries
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
, and then only rarely.
Natural monopolies
While in the single-output case, economies of scale are a sufficient condition for the verification of a natural monopolyNatural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
, in the multi-output case, they are neither necessary nor sufficient. Economies of scope are, however, a necessary condition.
As a matter of simplification, it is generally accepted that, should economies of scale and of scope both apply, as well as sunk costs or other entry barriers, then markets may have monopoly features.
See also
- Economies
- DistributionDistribution (business)Product distribution is one of the four elements of the marketing mix. An organization or set of organizations involved in the process of making a product or service available for use or consumption by a consumer or business user.The other three parts of the marketing mix are product, pricing,...
- MarketingMarketingMarketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
- Economies of scaleEconomies of scaleEconomies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
- Production, costs, and pricingProduction, costs, and pricingThe following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
- Economic efficiency
- Theory of the firmTheory of the firmThe theory of the firm consists of a number of economic theories that describe the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market.-Overview:...