Concepts of Scales in Competitive Analysis

Economies of scope concentrate on the average price of production of various products. However, economies of scope differ from markets of volume because the market of the volume focuses on the volume of output of a firm while economies of scope have to do with the average price of the output of various firms. This difference of focus helps explain why economies of scope are more productive than economies of volume. For instance, an automobile company may dominate the production of automobiles but if it had to compete in a global market, it would have trouble making its profits and its sales would likely be far lower than they are today. In addition, such a company could experience serious damage to its reputation by having to deal with negative public perceptions.

In contrast, economies of scope concentrate on the extent of economic activity. With economies of scope, there is more total economic activity than with economies of volume because there are more products being produced. More products mean more opportunities for gainful employment, which leads to economic growth. The concept of economies of scope is therefore not about the average cost of production but rather about the number of potential buyers and sellers of the items in a market.

In a broader sense, economies of scope can also refer to the number of potential customers that a firm has. This is because some firms tend to specialize in producing particular kinds of merchandise while at the same time limit their scope of business activities to those activities that are not related to the product. Examples of firms that specialize in producing paper products are the pulp and lube industry. These firms have an economy of scale advantage in that they can produce large quantities of paper products at the same rate as the other firms who specialize in other kinds of merchandise.

At the same time, a firm that manufactures goods that are used in production processes for other kinds of merchandise have economies of scope because their operations do not extend over the entire spectrum of the business universe. A manufacturer that only makes paper products can be considered to have a narrow scope of business, whereas one that makes metal products can be considered to have a broad one. The firm that produces paper products can also be thought of as having a narrow economy of scale, even though it operates at a national level. And, the firm that manufactures metal products can be considered to have a wide scope of opportunity because it can operate at a regional or even local level.

Economies of scopes can be thought of in terms of cost advantages. At a macroeconomic level, economies of scope occur when firms can coordinate to produce a single product at a lower cost than could be obtained at a larger scale by working individually. The existence of economies of scope at the macroeconomic level is important because it leads to the existence of market competition. Firms operating at smaller scales tend to be more efficient than firms that operate at larger scales because the costs of running a business are spread across a larger number of products.

Price ceilings can be seen as the result of economies of scope, and they affect both the cost and the price of goods or services. For example, if there is a price ceiling above the long-run average price of a good in a market, a firm may feel that it has to cut prices below this ceiling in order to capture the consumers who will be tempted to buy its goods and services below the ceiling. In turn, the firm has to accept either lower orders or lower margins in order to maximize its profits. Both the short-run and the long-run effects of economies of scope are affected by the existence of price ceilings.

Economies of scopes are also associated with internal economies of scale. Within a firm, firms may be positioned to make use of economies of scope to reduce costs and improve productivity. For instance, firms located in different locations may be able to coordinate the production process to ensure that output is highest when most raw materials are available. Likewise, firms may be able to use economies of scope to eliminate waste and improve efficiency. These internal economies of scopes can account for much of the difference between value chains and the sizes of firms.

The nature of firms and their interactions with external economies of scope are intimately related to each other, but no theory of economic activity can explain how these relationships develop or how they affect decision making. Instead, it is important to understand the dynamics of firm size and their relation to economies of scope. Large firms have economies of scope that can lead to specialization, increased production, and the efficiencies associated with scale. Small firms, on the other hand, may have minimal economies of scopes, limited inputs, and little room for growth. In a situation where a firm must expand in order to meet consumer demands, it will have little room for expanding its inputs or operations. Thus, a key concept for managers is one product line per economy of scope, where a firm can build up from a small “seed” to a mid-size firm as the demand for that firm’s products increases.