Measurement and Sources of Economies of Scope: A Primal Approach

Scope economies (reflecting the benefit of a multioutput firm) have been defined by Baumol, Panzar, and Willig in the context of cost functions. This paper uses Luenberger's shortage function to develop a general measure of scope economies directly from the underlying technology. The analysis applies under complete as well as partial specialization. Our primal measure of economies of scope is decomposed into four additive parts: one measuring complementarity, one reflecting economies of scale, one reflecting convexity of the technology, and one reflecting the role of catalytic outputs. This decomposition appears useful and helps generate valuable insights into the economics of specialization. (JEL: D 2, L 1)