Economies of scope are conceptually similar to
economies of scaleEconomies of scale, in microeconomics, are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as scale is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a...
. 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
marketingMarketing is an integrated communications-based process through which individuals and communities are informed or persuaded that existing and newly-identified needs and wants may be satisfied by the products and services of others....
and
distributionDistribution is one of the four elements of 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....
, of
different types of productsThe noun 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. Since 1695, the word has referred to "thing...
.
Economies of scope are conceptually similar to
economies of scaleEconomies of scale, in microeconomics, are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as scale is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a...
. 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
marketingMarketing is an integrated communications-based process through which individuals and communities are informed or persuaded that existing and newly-identified needs and wants may be satisfied by the products and services of others....
and
distributionDistribution is one of the four elements of 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....
, of
different types of productsThe noun 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. Since 1695, the word has referred to "thing...
. Economies of scope are one of the main reasons for such marketing strategies as
product bundlingProduct 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 liningProduct 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 brandingFamily branding is a marketing strategy that involves selling several related products under one brand name. Family branding is also known as umbrella 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."
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
advertisingAdvertising is a form of communication used to influence individuals to purchase products or services or support political candidates or ideas. Frequently it communicates a message that includes the name of the product or service and how that product or service could potentially benefit the consumer...
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
synergiesSynergy is the term used to describe a situation where different entities cooperate advantageously for a final outcome. Simply defined, it means that the whole is greater than the sum of the individual parts. Although the whole will be greater than each individual part, this is not the concept of...
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
industriesAn industry is the manufacturing of a good or service within a category. Although industry is a broad term for any kind of economic production, in economics and urban planning industry is a synonym for the secondary sector, which is a type of economic activity involved in the manufacturing of raw...
, 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 monopolyIn economics, a natural monopoly occurs when, due to the economies of scale of a particular industry, the maximum efficiency of production and distribution is realized through a single supplier....
, 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
- Economies
- Distribution
Distribution is one of the four elements of 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....
- Marketing
Marketing is an integrated communications-based process through which individuals and communities are informed or persuaded that existing and newly-identified needs and wants may be satisfied by the products and services of others....
- Economies of scale
Economies of scale, in microeconomics, are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as scale is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a...
- Production, costs, and pricing
In microeconomics, industrial organization is the field which describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
- Economic efficiency