Economies of scope can be defined as the cost advantages that are faced by the firms when they prefer to provide a variety of products instead of specializing in the manufacturing, production or delivering of a sole product or service. Economies of scope arise from the allocation or joint deployment of inputs and lead to lessening in per unit costs. Economy of scope is usually linked to the fact in which per unit cost moves downwards when the output rises. (Given 1996; Preyra & Pink 2006).
In case of pharmaceutical industries, the economies of scale are very important as it reduces a major degree of research and development cost, as R&D is the major cost that pharmaceutical industry has to face. For example for illness like cold and fever, there are similar chemicals used in manufacturing of medicines for cold and flu such as Acetaminophen, Phenylephrine hydrochloride, Dextromethorphan hydrobromide, etc.
Economies of Scale:
Economies of scale can be defined as the factor that can reduce average cost of production when the overall output increases. The companies look forward for producing a larger amount of goods and service, which relatively reduce the per unit or variable cost, which helps the company to reduce its cost of production and enjoys the competitive advantage over the rivals. For example, in the pharmaceutical business Research and Development is very crucial, but the cost of manufacturing the drug is vast and mounting. Therefore a number of pharmaceutical companies have merge in recent years because of the companies’ desire to distribute their R&D disbursement over a larger volume of goods and services.
The output should not reach the diseconomies of scale and perhaps raw materials, labour and capital (all the factors of production) should be used efficiently and effectively.