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

39 Pages Posted: 17 Aug 2015 Last revised: 2 Dec 2015

See all articles by Sara Bormann

Sara Bormann

Washington University in St. Louis - John M. Olin Business School

Jan Bouwens

Amsterdam Business School

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: November 20, 2015

Abstract

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).

Keywords: Economies of scale and scope, supermodularity, spillover, organizational structure, imbalance

JEL Classification: M41, M11, D24, L23

Suggested Citation

Bormann, Sara and Bouwens, Jan and Hofmann, Christian, Understanding the Cost Structure of a Firm: Balancing Activities and Achieving Economies of Scope (November 20, 2015). AAA 2016 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2645477 or http://dx.doi.org/10.2139/ssrn.2645477

Sara Bormann (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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