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. If a firm can produce an optimum level of output of each its product line cheaper than a blend of separate firms, each producing a sole product at an optimum output level. 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. In case of cold medication industry the company has benefit to adopt the economies of scope in introducing the medicine for flu, when they are already dealing in the market for medication for cold. 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. If the industries of cold medication adopt the economies of scope, it will save the cost of R&D hence facing a prominent decrease in marginal cost of producing extra amount of doses for similar kind of diseases.
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.