Definition
Economies of scope arise if the total cost of producing more than one product is lower when they are produced by the same firm rather than separate firms. For example, there are economies of scope if the total cost of producing 100 units of product X and 50 units of product Y is lower if both X and Y are produced by the same firm, rather than one firm producing 100 units of X and another producing 50 units of Y. Economies of scope are somewhat similar to economies of scale in reducing costs for larger firms. However, the mechanism is quite different. Economies of scale exist if a firm’s average cost per unit of a particular product decreases as the volume of its output increases.
Commentary
Economies of scope may arise because there are some common machines for producing multiple products, so that it is cheaper to produce them in the same firm. Or there may be common overheads like management, marketing, and distribution networks which do not have to be duplicated if the same firm produces multiple products. Another source of scope economies lies in synergies or complementarities between the skills or processes required for producing different goods or services, which makes it more productive to combine them in the same firm. Many of these sources of scope economies are found in the economics of digital platforms. For example, suppose an e-commerce firm has accumulated data on the addresses, phone numbers, buying behaviour, and payment methods of a large number of customers; as well as phone numbers, location, and ratings of a large fleet of delivery riders, and algorithms that can optimally assign them. It can use these resources to diversify at low cost into delivery of food, groceries, and parcels.
Just as economies of scale give a cost advantage to firms which produce a particular product on a larger scale as compared to their rivals, economies of scope give a cost advantage to firms which produce a wider range of products than their rivals. Like economies of scale, this advantage can make a larger firm a more effective competitor, and can be beneficial for consumers, or it can serve as a barrier to entry and permit the establishment of a dominant position which can be abused. Unlike scale economies, scope economies are not mentioned explicitly in the Competition Act. Theoretically, they might be viewed as contributing to an abuse of dominance under section 4(2)(e) if an enterprise or group “uses its dominant position in one relevant market to enter into, or protect, other relevant market”. But after the Supreme Court’s landmark judgment in Schott Glass, an anti-competitive effect must be proved. Even before that, the CCI’s orders in Umar Javeed (see especially para 629) and XYZ (para 407) mentioned Google’s economies of scope across its different products as an entry barrier, contributing to its dominant position. But its contravention of the Act was not its dominance, but in its various anti-competitive practices, including leveraging its dominant position under section 4(2)(e).
Economies of scope can also be a motivating factor for a merger, which may harm competition or promote it Section 20(4)(n) allows the Competition Commission of India (CCI) to balance the adverse effects of a combination against its benefits, although the Act does not list any specific benefits. While approving the Air India-Vistara merger, the CCI referred to economies of scope that the merged firm could reap by combining passengers travelling on different intercity routes by routing them through hubs rather than direct flights. This would channel more traffic on larger aircraft, whose unit costs per seat-kilometre are lower due to economies of density (Combination Registration No. C-2023/04/1022, para 105).
Case References
Competition Commission of India, Case No. 39 of 2018, In Re: Mr. Umar Javeed and Ors. v Google LLC and Ors.
Competition Commission of India, Case No. 07 of 2020, In Re: XYZ (Confidential) v Alphabet Inc. and Ors.
Competition Commission of India, Combination Registration No. C-2023/04/1022.
Supreme Court of India, Civil Appeal No. 5843 Of 2014, Competition Commission of India v Schott Glass India Pvt. Ltd. & Anr.