Understanding the Cost Structure of a Firm : Balancing Activities and Achieving Economies of Scope

This paper studies if it matters whether a firm's products are produced jointly in one organizational unit or separately in multiple organizational units. We propose that spillovers between products (e.g., knowledge and information transfers) are more likely to occur when production takes place in one organizational unit. Our evidence confirms that when multiple products are produced in one organizational unit, such economies-of-scope effects materialize. We also find that the spillover effects start to dissipate when the activity levels for the products are unequal. For example, we find that the positive spillover of Product B with regard to the efficiency achieved in producing Product A is significantly reduced as the level of activities in producing Product A differs from the level of activities in producing Product B. Importantly, our findings are unrelated to the centralization or decentralization of decision rights, as the decision rights are identical across organizational units, independent of the number of products assigned to a unit. Our results are based on single firm study. In particular, we study a divisional setting of a transportation firm where, at each location, the firm either decides to offer two services (i.e., food and non-food transportation) or to offer only one service (i.e., either food or non-food transportation)