What Are Economies of Scope? Economies of Scope In A Nutshell

An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

DefinitionEconomies of Scope is an economic concept that refers to the cost advantages a company can achieve when it produces a variety of products or services rather than specializing in a single product or service. It is the opposite of economies of scale, where cost savings are achieved by producing a larger quantity of a single product. Economies of scope result from sharing resources, knowledge, or processes across multiple products or services within the same organization.
Key ConceptsDiversification: Economies of scope are often associated with diversification, where a company expands its product or service offerings to enter new markets or cater to a broader customer base.
Resource Sharing: Companies can benefit from economies of scope by sharing common resources, such as production facilities, distribution networks, research and development (R&D) teams, or marketing efforts across multiple product lines.
Cost Reduction: The primary goal of economies of scope is to reduce the average cost per unit of production by spreading fixed costs over a wider range of products or services.
ExamplesConglomerates: Conglomerate companies, such as General Electric, benefit from economies of scope by operating in diverse industries like aviation, healthcare, and energy. Shared R&D, manufacturing capabilities, and distribution networks result in cost savings.
Fast-Food Chains: Fast-food chains like McDonald’s offer a broad menu with various items. They benefit from economies of scope by sharing cooking equipment, staff, and supply chain logistics across different menu items.
Media Companies: Media companies that produce both print and digital content can reduce costs by sharing editorial teams, content distribution platforms, and marketing efforts.
AdvantagesCost Efficiency: Economies of scope allow companies to produce multiple products or services more efficiently, reducing the overall cost structure.
Risk Diversification: Diversifying product or service offerings can help spread business risk, making the company less vulnerable to market fluctuations in a specific industry.
Competitive Edge: Companies with a diverse portfolio can leverage their capabilities to enter new markets and compete more effectively.
LimitationsManagement Complexity: Managing a diverse portfolio of products or services can be complex and may require different skill sets, strategies, and market insights.
Resource Allocation: Allocating resources effectively across different business units or product lines can be challenging, leading to potential conflicts over resource allocation.
Market Fit: Not all products or services may fit well within a company’s portfolio, and the pursuit of economies of scope can dilute a company’s brand and focus.
Real-World ExampleA major automobile manufacturer, such as Toyota, benefits from economies of scope by producing a wide range of vehicle models, from compact cars to SUVs and hybrids. Toyota can share manufacturing facilities, research and development efforts, and supply chain resources across its diverse product lines, leading to cost savings and a competitive edge in various market segments.

Understanding economies of scope

Economies of scope occur when a company can produce two or more products simultaneously at a lower cost than producing them individually.

Consider the example of a vehicle manufacturer with a single assembly line producing one basic sedan.

The manufacturer could increase its economies of scope by adding a sports and a luxury version since all three products use the same equipment, skilled labour, raw materials, and distribution channels

With three sedan models instead of one, the cost of producing each sedan decreases because the company’s resources stretch further.

In other words, it would cost more to operate a separate factory and assembly line for each sedan variant. 

The theory is particularly useful whenever a business has fixed factors of production such as space, labor, raw materials, and taxes.

In simple terms, increasing economies of scope allows the business to reach more consumers per unit of money spent.

Five more examples of economies of scope

Here are five more examples of economies of scope:


Many warehouses store goods owned by multiple clients.

Each client rents a section of physical floor space, which maximizes the investment made by the business to build, lease, or operate the warehouse.


Raw ethanol, which is produced during the beer fermentation process, has been used by some breweries to make hand sanitizer during the COVID-19 pandemic.


Commercial flights also transport freight cargo in addition to passengers and their luggage.

This maximizes the return on investment associated with the high operating costs operating each flight.

Gas stations

Profit margins on the sale of gas are typically low, so gas stations sell soda, milk, baked goods, ice, car products, and many other items to achieve economies of scope.


Once associated with happy hour and the sale of beer, many bars have diversified to offer breakfast, lunch, and dinner with perks such as free wi-fi.

Other bars utilize live music or host sports-themed events to maximize the use of the premises.

How do economies of scope occur?

There are three main mechanisms for the facilitation of economies of scope. 

1 – Co-products 

Economies of scope occur this way when the production of one good produces another product as a natural by-product.

For the business, finding a productive use or market for these secondary products reduces waste and increases revenue

During the production of cheese, for example, milk is separated into whey and curds.

Once thought to be a waste product, the whey is now sold to farmers as a high protein feed for dairy cows.

2 – Complementary production processes

Economies of scope can also result from the direct interaction of two or more production processes. 

Companion planting in agriculture is the most obvious example, with nitrogen-fixing legumes often sown with other fruit and vegetable crops to increase yields.

These legumes also outcompete weeds which has the flow-on effect of reducing herbicide costs.

3 – Shared inputs

When production inputs such as land, labor, and capital have more than one use, economies of scope can also result. 

Kleenex Corporation manufactures many paper-based products including sanitary napkins, paper towels, facial tissues, and toilet paper.

These product lines utilize similar raw material inputs, manufacturing processes, and distribution channels.

Economies of Scope vs. Economies of Scale

In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

The main premise of economies of scale is how to reduce the cost per unit as production gets scaled up.

This usually happens through internal and external factors:

On the contrary, economies of scope focus on creating an advantage in producing a variety of products.

Take the example of a car manufacturer.

Whereas economies of scale will focus on the decreased cost of production per car happening, for instance, because manufacturing has been robotized.

Economies of scope will happen as a result of the fact that two products might share the same production line and assembly.

So for instance on the same production line the company can make tow types of cars, which tackle different customer segments!

Key takeaways

  • Economies of scope occur when a company can produce two or more products simultaneously at a lower cost than producing them individually. Increasing economies of scope allow the business to reach more consumers per unit of money spent.
  • Economies of scope are frequently used in business. Examples include warehouse storage, gas stations, bars, commercial airlines, and breweries.
  • Economies of scope arise in three common scenarios: co-products, co-products, complementary production processes and shared resources.

Key Highlights

  • Definition and Origin: Economies of scope occur when a company produces multiple related products together, resulting in lower costs for each product. This concept is based on the idea that producing a variety of products together reduces unit costs and enhances efficiency.
  • Examples: Economies of scope are present in various industries and scenarios:
    • Warehouses: Renting space to multiple clients maximizes warehouse investment and resource utilization.
    • Breweries: Utilizing by-products like raw ethanol for additional purposes, like making hand sanitizer.
    • Airlines: Carrying both passengers and freight on commercial flights to optimize operational costs.
    • Gas Stations: Selling a variety of items alongside gas to increase profitability.
    • Bars: Expanding services, such as offering meals or hosting events, to make the most of the establishment’s premises.
  • Mechanisms for Economies of Scope:
    • Co-products: When the production of one good yields another as a by-product, finding a use or market for these by-products reduces waste and increases revenue.
    • Complementary Production Processes: Interaction between different production processes can lead to economies of scope. For instance, companion planting in agriculture.
    • Shared Inputs: When production inputs like labor, land, and capital have multiple uses, economies of scope can arise. Example: Kleenex Corporation’s range of paper-based products.
  • Distinguishing from Economies of Scale:
    • Economies of Scale: Focuses on decreasing costs per unit as production scales up. Factors contributing to this include cost efficiency, technology, organizational and financial structure improvements, and increased bargaining power.
    • Economies of Scope: Concentrates on producing a variety of products together, sharing resources and processes. This allows the business to reach more consumers per unit of expenditure.

Case Studies

Industry/Business ContextDescriptionApplication of Economies of ScopeExamples and Impact
Conglomerate CompaniesDiversified corporations with various business units.Centralized support functions, such as HR, finance, and IT, serving multiple subsidiaries. Cost-sharing and efficiency gains across diverse business segments.Companies like General Electric (GE) benefit from reduced administrative overhead by managing diverse business units under one umbrella.
RetailRetailers offering a wide range of product categories.Centralized distribution and logistics operations for various product lines. Shared resources, such as warehouses and transportation, reduce overall distribution costs.Retail giants like Walmart and Amazon benefit from economies of scope by leveraging their extensive logistics networks for diverse product categories.
AirlinesAirlines providing various passenger and cargo services.Using the same aircraft for both passenger and cargo operations. Shared fleet and maintenance facilities result in cost savings and utilization efficiencies.Airlines like FedEx and UPS maximize economies of scope by combining passenger and cargo services on their planes.
Hospitality IndustryHotel chains offering multiple hotel brands and services.Shared reservation systems, marketing, and loyalty programs across different brands. Economies of scale in marketing and customer acquisition.Marriott International operates a diverse portfolio of hotel brands and leverages economies of scope for centralized reservation and marketing strategies.
Technology CompaniesTech companies offering hardware, software, and services.Bundling hardware and software products with complementary services. Cross-selling products and services, resulting in increased revenue and customer loyalty.Companies like Apple bundle hardware (e.g., iPhone) with software (e.g., iOS) and services (e.g., Apple Music) to create a seamless customer experience.
Media and EntertainmentMedia conglomerates with diverse content and distribution.Cross-promotion of movies, TV shows, and merchandise across various platforms. Maximizing brand recognition and monetization opportunities.Disney leverages its diverse portfolio of content (e.g., Marvel, Star Wars) across theme parks, merchandise, and streaming services for economies of scope.
Food and BeverageCompanies producing a variety of food and beverage products.Shared manufacturing facilities, distribution, and marketing resources. Cost efficiencies and brand diversification across product lines.Nestlé operates in multiple food and beverage categories (e.g., coffee, chocolate, pet food) and achieves economies of scope through shared resources.
Financial ServicesBanks and financial institutions offering a range of services.Cross-selling financial products, such as banking, insurance, and investment services. Maximizing customer relationships and revenue streams.JP Morgan Chase, for instance, combines banking, investment, and insurance services to create comprehensive financial solutions for customers.

Connected Economic Concepts

Market Economy

The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.


When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation. 

Asymmetric Information

Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.


Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.


An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.

Market Types

A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Rational Choice Theory

Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.

Conflict Theory

Conflict theory argues that due to competition for limited resources, society is in a perpetual state of conflict.

Peer-to-Peer Economy

The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.


The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.

Command Economy

In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Labor Unions

How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.

Bottom of The Pyramid

The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”


Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.

Market Fragmentation

Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

L-Shaped Recovery

The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth.  The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.

Comparative Advantage

Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846.  Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.

Easterlin Paradox

The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.

Economies of Scale

In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Economies of Scope

An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

Price Sensitivity

Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Network Effects

In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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