Cost reduction from produdng compiemen- Economies of scope exist when the cost of joint production is less than the cost of produc-tary products ing multiple outputs separately. A firm will produce products that are complementary in the sense that producing them together costs less than producing them individually. Suppose that a regional airline offers regularly scheduled passenger service between midsize city pairs and that it expects some excess capacity. Also assume that there is a modest local demand for air parcel and small-package delivery service. Given current airplane sizes and configurations, it is often less costly for a single carrier to provide both passenger and cargo services in small regional markets than to specialize in one or the other. Regional air carriers often provide both services. This is an example of economies of scope. Other examples of scope economies abound in the provision of both goods and services. In fact, the economies of scope concept explains why firms typically produce multiple products.
Studying economies of scope forces management to consider both direct and indirect benefits associated with individual lines of business. For example, some financial services firms regard checking accounts and money market mutual funds as "loss leaders." When one considers just the revenues and costs associated with marketing and offering checking services or running a money market mutual fund, they may just break even or yield only a marginal profit. However, successful firms like Dreyfus, Fidelity, and Merrill Lynch correctly evaluate the profitability of their money market mutual funds within the context of overall operations. These funds are a valuable delivery vehicle for a vast array of financial products and services. By offering money market funds on an attractive basis, financial services companies establish a working relation with an ideal group of prospective customers for stocks, bonds, and other investments. When viewed as a delivery vehicle or marketing device, money market mutual funds may be one of the industry's most profitable financial product lines.
Analytical technique used to study relations among costs, revenues, and profits
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