See Economies of Scale

Even if a firm is to small to enjoy economies of scale in any individual product market, it can achieve economies by producing components that are used in several products. For example, petroleum refineries crack petroleum into many different products including gasoline, diesel, home heating oil, and other petroleum distillates. By producing many products, average production costs at a refinery are reduced. In essence, producing good A reduces the cost of producing good B. These economies of scope (or joint production) can result in significant cost reductions.

 

Economies of scope occur when one firm produces or distributes several different products that share the same production facility or inputs..

 

            Most gas stations have now become convenience stores that provide gas, food and car washing services. Nearly all chemical plants use petroleum as a basic input to produce paint, plastics, fertilizers and many other final products. Many software firms develop generic drivers or subroutines that they use over and over to produce numerous games and books on disk.

 

            Economies of scope, however, eventually face the same managerial control problems common to economies of scale. Adding the complexity of different products can make these problems harder since they involve coordination of managers responsible for many different products.