Economies of scope are conceptually similar to economies of scale. Whereas economies of scale primarily refer to efficiencies associated with supply-side changes, such as increasing or decreasing the scale of production, of a single product type, economies of scope refer to efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. Economies of scope are one of the main reasons for such marketing strategies as product bundling, product lining, and family branding.
Panzar and Willig coined the term "economies of scope" in 1975 in their paper "Economies of Scale and Economies of Scope in Multi-Output Production."[1]
Often, as the number of products promoted is increased and broader media used, more people can be reached with each dollar spent. This is one example of economies of scope. These efficiencies do not last, however; at some point, additional advertising expenditure on new products will start to be less effective (an example of diseconomies of scope).
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.
Natural monopolies
While in the single-output case, economies of scale are a sufficient condition for the verification of a natural monopoly, 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, then a natural monopoly exists.
See also
References
- ^ J. Panzar and R. Willig, "Economies of Scale and Economies of Scope in Multi-Output Production," Econ. Disc. Paper No. 33, Bell Laboratories, 1975. The paper was split in two and published as "Economies of Scale in Multi-Output Production," Quarterly Journal of Economics 91: 481-493 (1977); and as "Economies of Scope" American Economic Review, Vol. 71, No. 2, Papers and Proceedings(May, 1981), pp. 268-272. The 1981 paper gave a precise definition of economies of scope.
DJ Teece - Strategy: Critical Perspectives on Business and Management, 2005 Economies of scope and the scope of the enterprise Page 54