Economies of Scope

Why producing several related products together can be cheaper than making them separately, and how this explains bundles, ecosystems and diversified firms.

Economies of scale mean the cost per unit falls as a firm produces more of one product. Economies of scope are a related idea: it can be cheaper to produce several different products together than to produce each separately.

Where they come from

Economies of scope arise when products share inputs:

Shared facilities: a dairy uses the same collection network and plant for milk, curd, butter and paneer.
Shared knowledge: a pharmaceutical company’s research skills apply across many drugs.
Shared distribution: a consumer goods company uses one sales network to deliver soaps, shampoos and toothpaste to shops.
Shared brand: a trusted brand helps sell new products.
By-products: a sugar mill uses leftover sugarcane waste, called bagasse, to generate electricity and molasses to make ethanol.

Examples

Airlines carry passengers and cargo on the same flights.
Tech ecosystems offer email, maps, storage and video using the same data centres and user accounts.
Banks offer loans, deposits, insurance and investments to the same customers.
Restaurants use the same kitchen for breakfast, lunch and dinner.

Measuring economies of scope

If producing products A and B together costs less than producing them in two separate firms, economies of scope exist.

Implications

They help explain why firms diversify into related products.
They encourage bundling and ecosystems.
They can create barriers to entry, since a single-product rival may have higher costs.

Diseconomies of scope

Sometimes combining too many products creates complexity, confusion and management problems. Firms that stray too far from their core skills may find costs rise.

The dairy cooperative

A dairy cooperative collects milk from thousands of farmers. Using the same trucks, chilling centres and brand, it makes milk, yoghurt, butter, ghee and ice cream. A separate company making only ice cream would need its own supply chain and brand, costing more per unit.

Thinking economies of scope and scale are the same

Scale concerns producing more of one product; scope concerns producing a variety of products together more cheaply.

Key takeaways

Economies of scope mean producing several products together costs less.
They come from shared facilities, knowledge, distribution, brands and by-products.
They help explain diversification, bundles and ecosystems.
Too much variety can create diseconomies of scope.