The production process for telecommunications operators is characterized by economies of scale and scope. This is because telecommunications operators generally have high fixed costs and high shared and common costs.
Economies of scale occur when a firm’s average cost decreases when it increases its volume of production.
For example, economies of scale occur where a firm has high fixed costs of production. By increasing production, the firm can reduce its average cost per unit of output. (Provided that variable costs are relatively low, and/or do not increase quickly as production increases.)
Economies of scope occur when some of the fixed resources needed to produce one service can, at no extra cost, be shared to produce another service. In this situation, it is more economical to produce the two services together and pay only once for the shared resources, than to produce the services separately.
The practical significance of economies of scope and scale is that telecommunications operators with significant fixed costs can actually experience lower costs per unit by sharing resources and becoming a provider of multiple services. Operators that start out by providing only one service may benefit by diversifying and providing multiple services.
Customers also benefit because economies of scope translate into lower prices than under stand-alone production. By sharing resources the operator only pays once for the resources concerned. As a result the total cost of providing all of the operator’s services is lower.