Economies of Scope

An economy of scope occurs when a firm lowers its average total cost by producing a variety of goods or services together rather than separately. Producing complementary products, sharing inputs, or turning byproducts into saleable goods can make a multi‑product operation more cost‑efficient than parallel single‑product operations.

Key takeaways

• Economies of scope reduce average cost by spreading shared resources and processes across multiple products.
• They differ from economies of scale, which lower cost by increasing volume of a single product.
• Sources include co‑products, complementary production processes, and shared inputs.
• Common ways to achieve them are related diversification, mergers and acquisitions, and finding productive uses for byproducts.

How economies of scope arise

1. Co‑products (byproducts)

When one production process naturally yields two useful outputs, using or selling the secondary output lowers net cost.
* Example: Dairy processing yields cheese and whey. Whey can be sold as a nutritional product or used as animal feed, turning a waste stream into revenue or cost savings.
* Example: In paper manufacturing, “black liquor” (a byproduct) can be burned for energy, reducing fuel costs or converted into biofuel for sale.

2. Complementary production processes

Two or more processes may enhance each other when run together, increasing yield or reducing inputs.
* Historical example: The “Three Sisters”—corn, beans, and squash—are grown together; each plant supports the others, improving overall output and lowering cultivation costs.
* Modern example: An aerospace firm partnering with an engineering school can share training resources and interns, reducing labor and instructional costs for both.

3. Shared inputs

Products that use the same facilities, equipment, personnel, or marketing resources benefit from spreading those fixed costs over more outputs.
* Example: A restaurant producing chicken fingers and French fries uses the same fryers, cold storage, and staff.
* Example: A consumer goods company that markets many hygiene products can allocate the same design, marketing, and distribution resources across multiple brands.

How firms achieve economies of scope

• Related diversification: Expanding product lines that share inputs or processes.
• Mergers and acquisitions: Combining firms with complementary offerings to share facilities and distribution.
• Resource innovation: Finding commercial uses for byproducts or repurposing assets to serve multiple lines.
• Strategic partnerships: Sharing production, training, or distribution with other organizations.

Economies of Scope vs. Economies of Scale

• Economies of scope: Cost savings from producing a variety of goods together (efficiency from variety).
• Economies of scale: Cost savings from producing a larger quantity of a single good (efficiency from volume).
  Both can coexist: a firm may reduce unit costs by both diversifying product offerings and expanding production volume.

Example

A computer manufacturer repurposes its main factory to produce laptops, tablets, and phones. Fixed facility and overhead costs are allocated across multiple product lines, lowering the average cost per device compared with maintaining separate factories for each product.

Benefits

• Lower average production costs and higher profitability.
• Additional revenue streams from new products or byproducts.
• Better utilization of existing assets and talent.
• Competitive advantage through broader product offerings and shared capabilities.

How to know if economies of scope exist

If producing two or more products together yields a lower marginal or average cost than producing them separately, economies of scope are present. Firms can test this by comparing combined production costs with the sum of separate production costs.

Conclusion

Economies of scope unlock cost and revenue advantages when firms combine production processes, share inputs, or commercialize byproducts. Pursuing related diversification, strategic partnerships, or targeted acquisitions can help firms realize these efficiencies while expanding their product offerings.