The phenomenon of a grouping of firms that specialize in producing related products is called a cluster. For example, Ottawa has more than its share of software development firms; Montreal has a disproportionate share of Canada's pharmaceutical producers and electronic game developers; Calgary has its 'oil patch'; Hollywood has movies; Toronto is Canada's financial capital, San Francisco and Seattle are leaders in new electronic products. Provincial and state capitals have most of their province's bureaucracy. Clusters give rise to externalities, frequently in the form of ideas that flow between firms, which in turn result in cost reductions and new products.
Cluster: a group of firms producing similar products, or engaged in similar research.
The most famous example of clustering is Silicon Valley, surrounding San Francisco, in California, the original high-tech cluster. The presence of a large group of firms with a common focus serves as a signal to workers with the right skill set that they are in demand in such a region. Furthermore, if these clusters are research oriented, as they frequently are, then knowledge spillovers benefit virtually all of the contiguous firms; when workers change employers, they bring their previously-learned skills with them; on social occasions, friends may chat about their work and interests and share ideas. This is a positive externality.
Learning by doing
Learning from production-related experiences frequently reduces costs: The accumulation of knowledge that is associated with having produced a large volume of output over a considerable time period enables managers to implement more efficient production methods and avoid errors. We give the term learning by doing to this accumulation of knowledge.
Examples abound, but the best known may be the continual improvement in the capacity of computer chips, whose efficiency has doubled about every eighteen months for several decades – a phenomenon known as Moore's Law. As Intel Corporation continues to produce chips it learns how to produce each succeeding generation of chips at lower cost. Past experience is key. Economies of scale and learning by doing therefore may not be independent: Large firms usually require time to grow or to attain a dominant role in their market, and this time and experience enables them to produce at lower cost. This lower cost in turn can solidify their market position further.
Learning by doing can reduce costs. A longer history of production enables firms to accumulate knowledge and thereby implement more efficient production processes.
Economies of scope
Economies of scope define a production process if the production of multiple products results in lower unit costs per product than if those products were produced alone. Scope economies, therefore, define the returns or cost reductions associated with broadening a firm's product range.
Corporations like Proctor and Gamble do not produce a single product in their health line; rather, they produce first aid, dental care, and baby care products. Cable companies offer their customers TV, high-speed Internet, and telephone services either individually or packaged. A central component of some new-economy multi-product firms is a technology platform that can be used for multiple purposes. We shall analyze the operation of these firms in more detail in Chapter 11.
Economies of scope occur if the unit cost of producing particular products is less when combined with the production of other products than when produced alone.
A platform is a hardware-cum-software capital installation that has multiple production capabilities