Scalable Expertise: How Standardization Drives Scale and Scope
We develop and test a theory of firm size and scope centered on standardization: the extent to which a firm’s products are similar. Heterogeneous firms choose the number, quality and standardization of their products. Standardizing makes expanding scope less costly, which then increases the return to standardization. Standardized firms have endogenously higher marginal returns to scale—their marginal costs rise less sharply with scale—implying greater responsiveness to demand shifts. We construct a novel measure of standardization using detailed product characteristics and show support for the theory’s main predictions. We show that new product features from standardized firms diffuse more quickly.
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