Economies of scope are "efficiencies formed by variety, not volume" (the latter concept is "
economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
").
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 In economics, average cost or unit cost is equal to total cost (TC) divided by the number of units of a good produced (the output Q):
AC=\frac.
Average cost has strong implication to how firms will choose to price their commodities. Firms’ sale ...
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.
Economics
The term and the concept's development are attributed to economists John C. Panzar and Robert D. Willig (1977, 1981).
Whereas economies of scale for a firm involve reductions in the
average cost In economics, average cost or unit cost is equal to total cost (TC) divided by the number of units of a good produced (the output Q):
AC=\frac.
Average cost has strong implication to how firms will choose to price their commodities. Firms’ sale ...
(cost per unit) arising from increasing the scale of production for a single product type, economies of scope involve lowering average cost by producing more types of products.
Economies of scope make
product diversification, as part of the
Ansoff Matrix, efficient if they are based on the common and recurrent use of proprietary know-how or on an indivisible physical asset. For example, as the number of products promoted is increased, more people can be reached per unit of money spent. At some point, however, additional
advertising
Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
expenditure on new products may become less effective (an example of diseconomies of scope). Related examples include
distribution Distribution may refer to:
Mathematics
*Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations
* Probability distribution, the probability of a particular value or value range of a vari ...
of different types of
products
Product may refer to:
Business
* Product (business), an item that serves as a solution to a specific consumer problem.
* Product (project management), a deliverable or set of deliverables that contribute to a business solution
Mathematics
* Produ ...
,
product bundling
In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice ...
,
product lining
In marketing jargon, product lining refers to the offering of several related products for individual sale. Unlike product bundling, where several products are combined into one group, which is then offered for sale as a units, product lining i ...
, and
family branding
Umbrella branding (also known as family branding) is a marketing practice involving the use of a single brand name for the sale of two or more related products. Umbrella branding is mainly used by companies with a positive brand equity (value o ...
.
Economies of scope exist whenever the
total cost
In economics, total cost (TC) is the minimum dollar cost of producing some quantity of output. This is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes ...
of producing two different products or services (X and Y) is lower when a single firm instead of two separate firms produces by themselves.