What are Economies of Scope?

Economies of scope refer to lowering the average cost of goods and services by producing different products simultaneously. It is different from economies of scale where producing large quantity of products could decrease of average cost of production. In the case of economies of scope, cost reduction can be achieved by producing more types of products rather than quantities of a single product. For example, McDonalds achieve cost efficiency from producing both French fries and hamburgers. The costs of production is reduced because french fries and hamburgers share inputs such as food storage, labor, and other production factors.

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How Economies of Scope Work

Large firms aiming to achieve economies of scope attempt to cut their cost and achieve operational efficiency through a diversification strategy. The company may achieve efficiencies by producing complementary goods and services. This allows the company to reduce the average and marginal cost in the long run. Complementary goods can be described as goods whose use depends upon other goods. The company may also produce same product in different varieties for its ends users. For example, Proctor and Gamble used diversification strategy for its simple paper product by expanding its product line to numerous ends user such as consumer and hospital to achieve economies of scope. Another way to achieve economies of scope is by merging or acquiring another company. Merging or acquiring another company enables the company to combine different product lines which diminishes their marginal and average cost. Benefits of economies of scope, aside from operational efficiencies include: new customer acquisition and retention and reduced product line risk.

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns