Producing several products together can cost less than producing each separately, because some inputs serve more than one output.
Panzar and Willig formalised the condition in 1982. The savings come from shared inputs that are not exhausted by one use: a distribution network, a brand, a customer relationship, a body of knowledge. It is the analytical basis for most diversification arguments, and the test is whether the shared input is genuinely shareable or merely adjacent.
In practice
- A firm that adds a second product using the same sales force has scope economies; one that adds a second sales force has a second business.
- A university that teaches and researches with the same staff is cheaper than two institutions doing one each.
- Standing
- Distinct from economies of scale, which concern volume of one output rather than breadth across several.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money