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Economies of scope

From Academic Kids

Economies of scope are conceptually similar to Economies of scale. Whereas economies of scale apply to efficiencies associated with increasing or decreasing the scale of production, economies of scope refer to efficiencies associated with increasing or deceasing the scope of marketing and distribution. Whereas economies of scale refer to changes in the output of a single product type, economies of scope refer to changes in the number of different types of products. Whereas economies of scale refer primarily to supply-side changes (such as level of production), economies of scope refer to demand-side changes (such as marketing and distribution). Economies of scope are one of the main reasons for such marketing strategies as product bundling, product lining, and family branding.

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.

Not all economists agree on the importance of economies of scope. Some argue that it only applies to certain industries, and then only rarely.

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