Economies of scope

Economies of scope are "efficiencies formed by variety, not volume" (the latter concept is "economies of scale"). In the field of 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 (ATC) of production decrease as a result of increasing the number of different goods produced. For example, a gas station primarily sells gasoline, but can sell soda, milk, baked goods, etc. and thus achieve economies of scope since with the same facility, each new product attracts new dollars a customer would have spent elsewhere. The business historian Alfred Chandler argued that economies of scope contributed to the rise of American business corporations during the 20th century.

Economics

The term and the development of the concept are attributed to economists John C. Panzar and Robert D. Willig (1977, 1981). Their 1981 article notes that they had coined the term several years previously, and felt that its logic was "intuitively appealing".

Whereas economies of scale for a firm involve reductions in the average cost (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. Hofstrand notes that the two types of economy "are not mutually exclusive".