How is economies of scope measured?

Economies of scope refer to cost savings a firm achieves by producing multiple products jointly rather than separately. It is measured using the cost complementarity index or scope economies index, defined as:

$$\text{Scope Economies}=\frac{C(Q_1,Q_2)}{C(Q_1,0)+C(0,Q_2)}$$

Where:

• $C(Q_1,Q_2)$ = Total cost of producing both products $Q_1$ and $Q_2$ together.
• $C(Q_1,0)$ = Cost of producing only $Q_1$.
• $C(0,Q_2)$ = Cost of producing only $Q_2$.

If the index is less than 1, economies of scope exist (joint production is cheaper). If equal to 1, no economies of scope. If greater than 1, diseconomies of scope occur. This metric helps firms assess whether diversifying production is cost-efficient.