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

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. (C) 2010 Elsevier B.V. All rights reserved.