Economies of Scope from Shared Inputs

The prevailing explanation for large, multi-product firms is economies of scope from inputs shared across production lines. Using the Federal Trade Commission's Line of Business Surveys, we show that manufacturers report substantial shared inputs for both capital and management/marketing expenses that are correlated with firm size and scope. We estimate a nested CES production function between line-specific and shared inputs, which are substitutes with a substitution elasticity of 2.6. For the average firm, reducing shared inputs by 50% decreases revenue by 3.4%. Finally, synergies from greater scope economies generated by pooling shared inputs in merger simulations are small.