Economies of scope - Wikipedia

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 ... Economiesofscope FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Efficienciesformedbyvarietyofproductsorservicesoffered Economiesofscopeare"efficienciesformedbyvariety,notvolume"(thelatterconceptis"economiesofscale").[1]Ineconomics,"economies"issynonymouswithcostsavingsand"scope"issynonymouswithbroadeningproduction/servicesthroughdiversifiedproducts.Economiesofscopeisaneconomictheorystatingthataveragetotalcostofproductiondecreaseasaresultofincreasingthenumberofdifferentgoodsproduced.[2]Forexample,agasstationthatsellsgasolinecansellsoda,milk,bakedgoods,etc.throughtheircustomerservicerepresentativesandthusgasolinecompaniesachieveeconomiesofscope.[2] Contents 1Economics 1.1Jointcosts 1.2Naturalmonopolies 1.3Advantages 2Examples 3Seealso 4References Economics[edit] Thetermandtheconcept'sdevelopmentareattributedtoeconomistsJohnC.PanzarandRobertD.Willig(1977,1981).[3][4] Whereaseconomiesofscaleforafirminvolvereductionsintheaveragecost(costperunit)arisingfromincreasingthescaleofproductionforasingleproducttype,economiesofscopeinvolveloweringaveragecostbyproducingmoretypesofproducts. Economiesofscopemakeproductdiversification,aspartoftheAnsoffMatrix,efficientiftheyarebasedonthecommonandrecurrentuseofproprietaryknow-howoronanindivisiblephysicalasset.[5]Forexample,asthenumberofproductspromotedisincreased,morepeoplecanbereachedperunitofmoneyspent.Atsomepoint,however,additionaladvertisingexpenditureonnewproductsmaybecomelesseffective(anexampleofdiseconomiesofscope).Relatedexamplesincludedistributionofdifferenttypesofproducts,productbundling,productlining,andfamilybranding. Economiesofscopeexistwheneverthetotalcostofproducingtwodifferentproductsorservices(XandY)islowerwhenasinglefirminsteadoftwoseparatefirmsproducesbythemselves. T C ( Q X , Q Y ) < [ T C ( Q X , 0 ) + T C ( 0 , Q Y ) ] {\displaystyleTC(QX,QY)0,thereiseconomiesofscope.Itisrecommendedthattwofirmscancorporateandproducetogether. IfDSC=0,thereisnoeconomiesofscaleandeconomiesofscope. IfDSC<0,thereisdiseconomiesofscope.Itisnotrecommendedtoworktogetherforthetwofirms.[7]Diseconomiesofscopemeansthatitismoreefficientfortwofirmstoworkseparatelysincethemergedcostperunitishigherthanthesumofstand-alonecosts.[7] Foracompany,iftheywanttoachievediversity,theeconomyofscopeisrelatedtoresource,anditissimilartoresourcerequirementsbetweenenterprises.Relevancesupportstheeconomybyimprovingtheapplicabilityofresourcesinthemergedcompaniesandsupportingtheeconomicaluseofresources(suchasemployees,factories,technicalandmarketingknowledge)inthesecompanies.[8] Unlikeeconomiesofscale,"whichcanbereasonablybeexpectedtoplateauintoanefficientstatethatwillthendeliverhigh-marginrevenuesforaperiod",economiesofscopemayneverreachthatplateauatall.AsVenkateshRaoofRibbonfarmexplainsit,"Youmaynevergettoapointwhereyoucanclaimyouhaveright-sizedandright-shapedthebusiness,butyouhavetokeeptrying.Infact,managingtheongoingscope-learningprocessistheessentialactivityinbusinessstrategy.Ifyoueverthinkyou’veright-sized/right-shapedforthesteadystate,that’swhenyouaremostvulnerabletoattacks."[9] ResearchandDevelopment(R&D)isatypicalexampleofeconomiesofscope.InR&Deconomies,unitcostdecreasesbecauseofthespreadingR&Dexpenses.Forexample,R&Dlabsrequireaminimumnumberofscientistsandresearcherswhoselabourisindivisible.Therefore,whentheoutputofthelabincreases,R&Dcostsperunitmaydecrease.ThesubstantialindivisibleinvestinR&Dmayalsoimpliesthataveragefixedcostswillfallrapidlyduetotheoutputandsalesincrease.Theideasfromoneprojectcanhelpanotherproject(positivespillovers).[10][11] Strategicfit,alsoknownascomplementaritythatyieldseconomiesofscope,isthedegreetowhich,orwhatkindofactivitiesofdifferentsectionsofanentrepreneurcorporateswitheachotherthatcomplementthemselvestoachievecompetitiveadvantage.Throughoutthestrategicfit,diversifiedfirmscanmergewithinterrelatedbusinessesandsharetheresources.Thesekindofcorporationscanlimittheduplicationofresearchanddevelopments,provideamoreplannedanddevelopedsellingpipelinesforbusinesses.[8] Jointcosts[edit] Theessentialreasonforeconomiesofscopeissomesubstantialjointcostacrosstheproductionofmultipleproducts(IvanPng,ManagerialEconomics,1998:224-227).[12]ThecostofacablenetworkunderlieseconomiesofscopeacrosstheprovisionofbroadbandserviceandcableTV.Thecostofoperatingaplaneisajointcostbetweencarryingpassengersandcarryingfreight,andunderlieseconomiesofscopeacrosspassengerandfreightservices. Naturalmonopolies[edit] Whileinthesingle-outputcase,economiesofscaleareasufficientconditionfortheverificationofanaturalmonopoly,inthemulti-outputcase,theyarenotsufficient.Economiesofscopeare,however,anecessarycondition.Asamatterofsimplification,itisgenerallyacceptedthatmarketsmayhavemonopolyfeaturesifbotheconomiesofscaleandeconomiesofscopeapply,aswellassunkcostsorotherbarrierstoentry. Advantages[edit] Economiesofscopehavethefollowingadvantagesforbusinesses:[1] Extremeflexibilityinproductdesignandproductmix Rapidresponsestochangesinmarketdemand,productdesignandmix,outputrates,andequipmentscheduling Greatercontrol,accuracy,andrepeatabilityofprocesses Reducedcostsfromlesswasteandlowertrainingandchangeovercosts Morepredictability(e.g.,maintenancecosts) Fasterthroughputthankstobettermachineuse,[13]lessin-processinventory,orfewerstoppagesformissingorbrokenparts.(Higherspeedsarenowmadepossibleandeconomicallyfeasiblebythesensoryandcontrolcapabilitiesofthe“smart”machinesandtheinformationmanagementabilitiesofcomputer-aidedmanufacturing(CAM)software.) Distributedprocessingcapabilitymadepossibleandeconomicalbytheencodingofprocessinformationineasilyreplicablesoftware Lessrisk:Acompanythatsellsmanyproductlines,sellsinmanycountries,orbothwillbenefitfromreducedrisk(e.g.,ifaproductlinefallsoutoffashionorifonecountryhasaneconomicslowdown,thecompanywilllikelybeabletocontinuetrading) Examples[edit] Economiesofscopearisewhenbusinessessharecentralizedfunctions(suchasfinanceormarketing)orwhentheyforminterrelationshipsatotherpointsinthebusinessprocess(e.g.,cross-sellingoneproductalongsideanother,usingtheoutputsofonebusinessastheinputsofanother).[2] Economiesofscopeservedastheimpetusbehindtheformationoflargeinternationalconglomeratesinthe1970sand1980s,suchasBTRandHansonintheUKandITTintheUnitedStates.Thesecompaniessoughttoapplytheirfinancialskillsacrossamorediverserangeofindustriesthrougheconomiesofscope.Inthe1990s,severalconglomeratesthat"reliedoncross-selling,thusreapingeconomiesofscopebyusingthesamepeopleandsystemstomarketmanydifferentproducts"—i.e.,"sellingthefinancialproductsoftheonebyusingthesalesteamsoftheother"—whichwasthelogicbehindthe1998mergerofTravelersGroupandCiticorp.[2] 3Dprintingisoneareathatwouldbeabletotakeadvantageofeconomiesofscope,[14]asitisanexampleofsameequipmentproducing"multipleproductsmorecheaplyincombinationthanseparately".[1] Ifasalesteamsellsseveralproducts,itcanoftendosomoreefficientlythanifitissellingonlyoneproductbecausethecostoftravelwouldbedistributedoveragreaterrevenuebase,thusimprovingcostefficiency.Therecanalsobesynergiesbetweenproductssuchthatofferingarangeofproductsgivestheconsumeramoredesirableproductofferingthanwouldasingleproduct.Economiesofscopecanalsooperatethroughdistributionefficiencies—i.e.itcanbemoreefficienttoshiptoanygivenlocationarangeofproductsthanasingletypeofproduct. Furthereconomiesofscopeoccurwhentherearecostsavingsarisingfrombyproductsintheproductionprocess,suchaswhenthebenefitsofheatingfromenergyproductionhasapositiveeffectonagriculturalyields.[citationneeded] Seealso[edit] Economicefficiency Masscustomization Production,costs,andpricing Theoryofthefirm Economiesofscale Economiesofdensity Jointcost References[edit] ^abcJoelD.Goldhar;MariannJelinek(November1983)."PlanforEconomiesofScope".HarvardBusinessReview. ^abcd"Economiesofscaleandscope".TheEconomist.20October2008. ^JohnC.Panzar;RobertD.Willig(1977)."EconomiesofScaleinMulti-OutputProduction".QuarterlyJournalofEconomics.91(3):481–493.doi:10.2307/1885979.JSTOR 1885979. ^JohnC.Panzar;RobertD.Willig(May1981)."EconomiesofScope".AmericanEconomicReview.71(2):268–272.JSTOR 1815729. ^Teece,DavidJ.(September1980)."EconomiesofScopeandtheScopeoftheEnterprise".JournalofEconomicBehavior&Organization.1(3):223–247.doi:10.1016/0167-2681(80)90002-5. ^Lukas,Erica(23April2014)."HorizontalBoundariesoftheFirm".slideshare.{{citeweb}}:CS1maint:url-status(link) ^ab"EconomiesofScope",SpringerReference,Berlin/Heidelberg:Springer-Verlag,2011,doi:10.1007/springerreference_6618,retrieved20April2021 ^abArkadiyV,Sakhartov(November2017)."EconomiesofScope,ResourceRelatedness,andtheDynamicsofCorporateDiversification:EconomiesofScope,Relatedness,andDynamicsofDiversification".StrategicManagementJournal.38(11):2168–2188.doi:10.1002/smj.2654. ^VenkateshRao(15October2012)."EconomiesofScale,EconomiesofScope".Ribbonfarm. ^Akerman,Anders(2018)."Atheoryontheroleofwholesalersininternationaltradebasedoneconomiesofscope".CanadianJournalofEconomics.51(1):156–185.doi:10.1111/caje.12319.ISSN 1540-5982.S2CID 10776934. ^Hinloopen,Jeroen(1January2008),Cellini,Roberto;Lambertini,Luca(eds.),"Chapter5StrategicR&DwithUncertainty",TheEconomicsofInnovation,ContributionstoEconomicAnalysis,EmeraldGroupPublishingLimited,vol. 286,pp. 99–111,doi:10.1016/s0573-8555(08)00205-8,ISBN 978-0-444-53255-8,retrieved20April2021 ^Png,Ivan(1998).ManagerialEconomics.Malden,MA:Blackwell.pp. 224–227.ISBN 1-55786-927-8. ^Goldhar,JoelD.;Jelinek,Mariann(1November1983)."PlanforEconomiesofScope".HarvardBusinessReview.No. November1983.ISSN 0017-8012.Retrieved8May2020. ^Lee,Leonard(26April2013)."3DPrinting–TransformingTheSupplyChain:Part1".IBMInsightsonBusinessblog. vteMicroeconomicsMajortopics Aggregation Budgetset Consumerchoice Convexityandnon-convexity Cost Average Marginal Opportunity Implicit Social Sunk Transaction Cost–benefitanalysis Deadweightloss Distribution Economiesofscale Economiesofscope Elasticity Equilibrium General Exchange Externality Firms Goodsandservices Goods Service Household Income–consumptioncurve Information Indifferencecurve Intertemporalchoice Market Marketfailure Marketstructure Competition Monopolistic Perfect Duopoly Monopoly Bilateral Monopsony Oligopoly Oligopsony Paretoefficiency Preferences Price Production Profit Publicgoods Rationing Rent Returnstoscale Riskaversion Scarcity Shortage Substitutioneffect Surplus Socialchoice Supply&demand Uncertainty Utility Expected Marginal Wage Subfields Behavioral Business Computational Statisticaldecisiontheory Econometrics Engineeringeconomics Civilengineeringeconomics Evolutionary Experimental Gametheory Industrialorganization Institutional Labor Law Managerial Mathematical Microfoundationsofmacroeconomics Operationsresearch Optimization Welfare Seealso Economics Applied Macroeconomics Politicaleconomy Category Retrievedfrom"https://en.wikipedia.org/w/index.php?title=Economies_of_scope&oldid=1053840969" Categories:Monopoly(economics)ProductioneconomicsHiddencategories:CS1maint:url-statusUseAmericanEnglishfromFebruary2019AllWikipediaarticleswritteninAmericanEnglishArticleswithshortdescriptionShortdescriptionmatchesWikidataUsedmydatesfromFebruary2019AllarticleswithunsourcedstatementsArticleswithunsourcedstatementsfromJanuary2021 Navigationmenu Personaltools NotloggedinTalkContributionsCreateaccountLogin Namespaces ArticleTalk English Views ReadEditViewhistory More Search Navigation MainpageContentsCurrenteventsRandomarticleAboutWikipediaContactusDonate Contribute HelpLearntoeditCommunityportalRecentchangesUploadfile Tools WhatlinkshereRelatedchangesUploadfileSpecialpagesPermanentlinkPageinformationCitethispageWikidataitem Print/export DownloadasPDFPrintableversion Languages العربيةAzərbaycancaDeutschEspañolFrançais한국어ItalianoעבריתNederlands日本語PolskiPortuguêsРусский Editlinks