Modelling Economies of Scope
Economies of scope arise from synergies in the production of similar goods. The classical notion of joint production explains instances of such synergies by the fact that some factors of production are pure public inputs. We argue that this explanation applies much more generally than is usually assumed in the literature. Specifically, we show that the applicability of the joint public input explanation is essentially characterized by the property that synergies are decreasing as the scope of production increases; we also argue that the latter property of "substitutive" synergies represents the normal case. Secondly, we formalize a notion of comparative similarity of goods both in terms of the structure of inputs and in terms of the cost function itself. This leads to a structured repertoire of models of economies of scope, among which we determine a privileged subclass that combines flexibility with reduction of complexity and interpretability.
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