This paper aims to clarify the relationship between economies of scope and the scope of a firm. It identifies two ways that multi-product firms can achieve scope economies: 1) through shared know-how and its recurrent exchange across multiple products, and 2) through specialized indivisible assets that serve as common inputs for multiple production functions. The paper explores the efficiency rationale for corporate diversification using Williamson's transaction cost theory framework. It analyzes petroleum firms as an example, noting the recurrent technology transfers and specialized applications that are shared. The goal is to extend the theoretical framework to better understand multi-product diversification within firms.

1. Teece (1980) FB11001
1. Contribution:
This Paper attempts to clarify the relationships between economies of scope and scope of
the enterprise in the fashion suggested by Williamson, Captures two instances where multi
product firms capture scope economies and points out that there are likely more such instances
(The two are knowhow and its recurrent exchange with two or more products and specialized
indivisible asset which is common input across two or more production functions). In succinct
tries to explain the scope of the firm wrt efficiency based theory which was not done earlier.
2. Relevance of Writing this paper:
Diversification is a Salient Characteristic, the efficiency with which the firms allocate
resources internally contrast to how they might have been allocated in the open market then
becomes a topic of considerable importance, yet there have been few attempts to examine the
internal efficiency properties of the diversified enterprise, rather the focus was more on
growth, diversification and competition. Traditional economics has treated the firm like a black
box.
Moreover theory on EOS/SC and inter-product complementarities has sharpened the
understanding in multi-product production, but traditional literature in this area derives
organizational implications from industry cost functions which are flawed. EOS are neither
sufficient nor necerrary conditions for Cost Savings to be achieved by merging specialized firms
, but if they are costly to capture because of the transactional difficulties because of sharing a
common input, a multiproduct firm is more likely to yield compelling efficiencies.
3. Research Question:
The paper explores the efficiency rationale of Corporate Diversification, and asks whether the
theoretical framework developed by Williamson can be extended to explore multi product
diversification as there are subtle differences only in the types of transactions being
internalized in VI and Diversification.No new theory is being developed here but rather an
attempt to explain the relationships.
4. Theory:
Firms Do not come in predestined sizes, complementary configuration that economizes on transaction
cost and production costs are both important in its scope of activities.Theory made use of here is the
Transaction Cost Theory, Economies of scope exist in modern business,but a tension exists between
Panzar & Willig’s strong view on EOS and Teece’s view, which believes that producing both separately

2. Teece (1980) FB11001
need not exceed the joint cost always, and it is difficult to draw the boundary of the firm with such
conclusions.
Enterprises possessing know how (Knowledge Competency and technological capabilities) (First
aspect): When joint cost (Information cost), of production of two or more parts is lower than the cost of
producing each one separately.But a Limit to this is that the costs may increase when there is
simultaneous transfer of information to a number of applications. (Congestion Factor).
Specialized indivisible Asset: A Second aspect is when an indivisible asset yields economies of scale
and also scope, if it serves as an input for two or more purposes (Joint Production).The Cap to having EO
Scope here is when an asset can no longer be used for additional diversification.
5. Methodology and empirical evidence
Petroleum Firms, are analyzed (Technology transfers are recurrent, Specialized Applications,
Case of Intrafirm transfer, Only TCT is explored although there may be other reasons of
diversification), also a lot of complimentary technological inputs exist between the Petroleum
technology and Alternate Fuels.
Critique:
The paper took time to understand and is not comprehended properly, unable to justify with good
critique, but concern was that it has been carried out (empirical studies) where there is a high
overlap/modularity between the kind of activities and the knowledge used, in case of unrelated
activities the scope of the firm and its relation with economies might not be the same.