Economies of Scope and the Scope of the Enterprise: The Diversification of Petroleum Companies

This paper explores some comparative institutional considerations which help define the scope of the modern business enterprise. Specifically, an attempt is made to explain why a firm sometimes diversifies — through acquisition or de novo entry — into “related” product lines. The central hypothesis is that if economies of scope are based on the utilization of common knowhow of a “system” or “firm specific” kind, then integration yields attractive efficiency properties unavailable to unassisted markets for trading knowhow. This hypothesis is first developed in a general manner and then examined in the context of the petroleum industry’s diversification into alternate fuels. Empirical support for the hypothesis is found.