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Economies of diversification: A generalization and decomposition of economies of scope

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  • Chavas, Jean-Paul
  • Kim, Kwansoo

Abstract

The paper investigates the benefits of diversification for a multi-product firm. It examines economies of diversification, reflecting the cost reduction associated with producing outputs in an integrated firm (compared to specialized firms). The analysis applies under complete specialization as well as partial specialization (when firms are not fully specialized and/or when the specialization scheme does not cover all outputs). It decomposes economies of diversification into four additive parts: a part measuring complementarity among outputs; a part reflecting economies of scale; a part reflecting convexity; and a part reflecting the role of fixed cost. This new decomposition appears useful in investigating how scale effects, complementarity effects, and convexity effects can contribute to economies of scope in a multiproduct firm and helps generate valuable insights into the economics of specialization for multiproduct firms.

Suggested Citation

  • Chavas, Jean-Paul & Kim, Kwansoo, 2010. "Economies of diversification: A generalization and decomposition of economies of scope," International Journal of Production Economics, Elsevier, vol. 126(2), pages 229-235, August.
  • Handle: RePEc:eee:proeco:v:126:y:2010:i:2:p:229-235
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    Cited by:

    1. Maciejczak, Mariusz, 2015. "What are Production Determinants of Bioeconomy?," Problems of World Agriculture / Problemy Rolnictwa Światowego, Wydział Nauk Ekonomicznych, Uniwersytet Warszawski, vol. 15(30).
    2. repec:eee:jaitra:v:64:y:2017:i:pb:p:121-138 is not listed on IDEAS
    3. Eder, Andreas, 2017. "Cost efficiency and economies of diversification of biogas-fuelled cogeneration plants in Austria: a nonparametric approach," MPRA Paper 80369, University Library of Munich, Germany.
    4. Wang, Yuandi & Ning, Lutao & Chen, Jin, 2014. "Product diversification through licensing: Empirical evidence from Chinese firms," European Management Journal, Elsevier, vol. 32(4), pages 577-586.
    5. Hess, Sebastian, 2011. "Outsourcing, Regional Trade and Specialization: An Application to in the German Pig Sector," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114537, European Association of Agricultural Economists.
    6. Brandon Pope & Andrew Johnson, 2013. "Returns to scope: a metric for production synergies demonstrated for hospital production," Journal of Productivity Analysis, Springer, vol. 40(2), pages 239-250, October.
    7. Hess, Sebastian, 2011. "Outsourcing Decisions Of Pig Producers In Baden-Württemberg," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114509, German Association of Agricultural Economists (GEWISOLA).
    8. de Mesnard, Louis, 2011. "More firms, more competition? The case of the fourth operator in France's mobile phone market," International Journal of Production Economics, Elsevier, vol. 130(2), pages 186-195, April.
    9. Renner, Swetlana & Glauben, Thomas & Hockmann, Heinrich, 2012. "Measurement And Decomposition Of Flexibility Of Multi-Output Firms," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 124865, International Association of Agricultural Economists.

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