Returns to Scale and Scope 253of jointly producing the goods in the same quantities is $17 million. It follows
that SC (12 8 17)/(12 8) .15. Joint production implies a 15 percent
cost savings vis-à-vis separate production.
There are many sources for economies of scope. In some cases, a single
production process yields multiple outputs. Cattle producers sell both beef
and hides; indeed, producing cattle for beef or hides alone probably is not
profitable. In other cases, production of a principal good is accompanied by
the generation of unavoidable by-products. Often these by-products can be
fashioned into marketable products. Sawdust is a valuable by-product of lum-
ber production. Tiny plastic pellets (the by-product of stamping out buttons)
are used in sandblasting instead of sand. After the harvest, leftover cornstalks
are used to produce alcohol for power generation. Still another source of
economies is underutilization of inputs. An airline that carries passengers
may find itself with unused cargo space; thus, it contracts to carry cargo as
well as passengers. In recent years, many public school systems have made
their classrooms available after hours for day-care, after-school, and commu-
nity programs.
An important source of economies of scope is transferable know-how. Soft-
drink companies produce many types of carbonated drinks, fruit juices,
sparkling waters, and the like. Presumably, experience producing carbonated
beverages confers cost advantages for the production of related drinks.
Brokerage houses provide not only trading services but also investment advis-
ing and many bank-like services, such as mutual funds with check-writing priv-
ileges. Insurance companies provide both insurance and investment vehicles.
In fact, whole-life insurance is a clever combination of these two services in an
attractive package.
Scope economies also may be demand related. The consumption of many
clusters of goods and services is complementary. For instance, the same com-
pany that sells or leases a piece of office equipment also offers service con-
tracts. A select number of firms compete for the sales of cameras and
photographic film. Sometimes the delivery of multiple services is so common
and ubiquitous that it tends to be overlooked. Full-service banks provide a
wide range of services to customers. The leading law firms in major cities pro-
vide extensive services in dozens of areas of the law. (Of course, smaller, spe-
cialty law firms coexist with these larger entities.) Many large hospitals
provide care in all major medical specialties as well as in the related areas
of emergency medicine, mental-health care, geriatrics, and rehabilitative
therapy.CHECK
STATION 3Toshiba America Information Systems (a subsidiary of the parent Japanese company)
sells laptop computers, printers, disk drives, copiers, facsimile machines, and telephone
equipment in North America. Would you expect there to be economies of scope in these
product lines? If so, what are the sources of these economies?c06CostAnalysis.qxd 9/29/11 1:46 PM Page 253