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The cost advantages that may arise when performing two or more activities together within a single firm rather than performing them separately. When economies of scope exist, firms have an incentive to internalize (that is, perform in-house) the production of goods or services that otherwise would be acquired through transactions with external suppliers (see transactional analysis). This incentive is normally expressed in terms of reductions in production costs as a result of internalization (see transaction costs). Hence, economies of scope may arise where the goods or services in question share inputs to their production (e.g. by using excess capacity in power generation or indivisible machinery), are related to one another through input-output relations (one good being an input to the production of the other good), draw upon common technical or manual skills for their production, or can be most efficiently produced at roughly the same scale of output. This concept, when combined with the idea of economies of scale, provides an understanding of the forces that determine firm size and the nature of inter-firm relations in localized clusters of producers (Scott, 1988). (See production complex.)Â (MSG)
Reference Scott, A.J. 1988: New industrial spaces. London: Pion. |
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