Economies of Scope (Mariona)

In economics, the term "economies of scope" refers to a model/theory that defends that the ATC (Average Total Cost) of a company can decrease through broadening its production/services by diversifying its products. This model says that a company is considered within the 'economy of scope' concept when this one expands its productions from one successful product to more than one (that is usually related to the original). Through this action, the company is able to take advantage of the already cemented industry (by the first original product) and then diversify its production line with a lower cost/without this action being a cost overrun. This model says the product diversification in one same company proves to be of a cheaper cost and a lower time margin than if two different enterprises were to produce independently, precisely due to the previous cemented success of the one company in the same sector that decides to diversify [1][2].

Among the main advantages is an improvement in the company's economic and financial situation. Generating higher returns and increasing purchasing volumes with suppliers boosts financial health. Furthermore, making better use of machinery, resources, and processes helps ensure that the company's activity grows rather than declines. At the same time, this reduces the risk of bankruptcy, as new segments have been incorporated into the business [3].

However, the most common disadvantage is a loss of management efficiency. When expanding products and production, it is important not to forget to strengthen the part of the company responsible for business management. At the same time, the company may lose sight of the principles on which it was founded, since it should not be forgotten that quantity does not always mean quality. This potential decline in product quality could end up affecting the company's reputation, leading to a loss of customers [3].

A clear example is Google. Best known for running one of the world's most widely used search engines, Google now operates across a wide range of sectors: online advertising, video (YouTube), mobile operating systems (Android), cloud computing (Google Cloud), consumer devices such as Pixel smartphones and smartwatches, and artificial intelligence research (Google DeepMind). What makes this an economy of scope is that these businesses share the same core resources [1][2]. Google's data centres, custom AI chips (TPUs) and software infrastructure were built to power Search, but the same infrastructure now also runs YouTube and the services Google sells to its Cloud customers [4]. Similarly, the same family of AI models (Gemini) is used across all of Google's major products, from Search to Gmail and Android [4]. This allows each new service to be developed and run at a lower cost than it would be for a standalone company, a pattern that economists identify as a defining feature of large digital platforms [5][6]. Since 2015, Google has been part of a parent company, Alphabet, which also owns more experimental ventures such as Waymo (self-driving cars). Notably, Alphabet placed these businesses outside Google precisely because they were too unrelated to benefit from the same shared resources [7].

Even so, Google's diversification has its limits. The large majority of Alphabet's revenue still came from advertising in 2025, and its experimental ventures, grouped under "Other Bets", recorded an operating loss of $7.5 billion that year [8].

Economies of scope demonstrate how, in a capitalist market, power tends to reinforce itself. A company that has already accumulated significant resources (infrastructure, data, distribution networks, brand recognition) can use them to launch new products and then, according to this concept, achieve a much lower cost than if a new player is starting from scratch, or if independent companies were to be producing these products [1][2]. Consequently, each new product costs the established company less, generates additional revenue and data, and further strengthens its position. In other words, companies that are already powerful are best positioned to become even more powerful, which raises the barriers to entry for competitors and contributes to market concentration [5][6].

This concept acknowledges that sharing resources does not always reduce costs: when producing multiple goods jointly is more expensive than producing them separately, economists speak of diseconomies of scope [1]. However, the concept cannot explain or predict when this shift occurs. It offers a way to compare costs once they are known, but it does not clarify the extent to which a company can diversify before the costs of coordinating and managing its businesses outweigh the savings derived from shared resources. Nor does it address demand: economies of scope may reduce the cost of launching a new product, but they do not guarantee that consumers will want it. This raises a question regarding governance. If neither the company nor the regulator can determine the tipping point in advance, it is difficult to assess whether a platform's expansion will generate real efficiencies or simply lead to a greater concentration of market power.

References

[1] Panzar, J. C. & Willig, R. D. (1981). "Economies of Scope". American Economic Review, 71(2), 268–272.

[2] Teece, D. J. (1980). "Economies of scope and the scope of the enterprise". Journal of Economic Behavior & Organization, 1(3), 223–247.

[3] Economia i Finances. "Economies d'abast". Retrieved 6 October 2026.

[4] Alphabet Inc. (2026). Form 10-K: Annual Report for the Fiscal Year Ended December 31, 2025. U.S. Securities and Exchange Commission. Retrieved 6 October 2026.

[5] Parker, G., Petropoulos, G. & Van Alstyne, M. (2021). "Platform mergers and antitrust". Industrial and Corporate Change, 30(5). Retrieved 6 October 2026.

[6] Crémer, J., de Montjoye, Y.-A. & Schweitzer, H. (2019). Competition Policy for the Digital Era. European Commission.

[7] Page, L. (2015). "2015 Founders' Letter". Alphabet Investor Relations. Retrieved 6 October 2026.

[8] Alphabet Inc. (2026). 2025 Annual Report. U.S. Securities and Exchange Commission. Retrieved 6 October 2026.