Economies of scope

ALL 0-9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Economies of scope, an economic theory, highlights the cost benefits a company can reap by diversifying its product or service offerings rather than focusing on a single specialty. While it shares similarities with economies of scale^[1] – a concept that deals with cost advantages stemming from increased production volume of a single item – they are fundamentally different. Industries such as cable networks and airlines, characterized by high joint costs, often exemplify economies of scope, as they utilize the same resources to provide diverse services. This theory is instrumental in natural monopolies and significantly impacts a business’s product design, market adaptability, cost predictability, and risk mitigation. Economies of scope enhance overall economic efficiency and underpin strategies like mass customization and optimal cost structures.

Terms definitions

1. ↑ economies of scale. Economies of scale refers to the enhanced production efficiency achieved as the volume of goods produced escalates. Commonly, by attaining economies of scale, a business can reduce the average cost per unit due to amplified production, as fixed costs are distributed over a larger quantity of goods. Elements that contribute to economies of scale encompass purchasing (procuring materials in bulk via long-term agreements), managerial (heightened specialization of managers), financial (securing lower-interest rates when borrowing from banks and access to a broader spectrum of financial tools), marketing (distributing the expense of advertising across a broader output range), and technological (leveraging the inverse correlation between the capital cost of machinery and its size). It's crucial to highlight that economies of scale can also be experienced externally, for instance, through the expansion of a specific industry within a certain geographical region.

Economies of scope (Wikipedia)

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 business historian Alfred Chandler argued that economies of scope contributed to the rise of American business corporations during the 20th century.

« Back to Glossary Index