Where Do Client-Specific Scope Economies Come from? A Revealed Preference Analysis

Abstract

Cross-selling – selling multiple products or services to a buyer – is a common practice in business-to-business markets. In this paper, I exploit the preferences revealed in the relationships between buyers and suppliers to investigate the origin and magnitude of client-specific economies of scope. I use data from the UK corporate legal market to estimate the relative importance of cost, product line expertise and client-specific scope economies in the creation of economic value.

I find evidence of a large opportunity cost of terminating a buyer-supplier relationship. Moreover, scope extensions are associated with less value creation at lower levels of scope. The losses tend to be reduced as scope increases. These findings suggest two sources of increasing returns. The first is the existence of a large cost of creating a new relationship. The second is supplier's ability to reduce the costs associated with delivering a new line of product to an existing buyer, above and beyond the cost of creating the relationship.

In addition to these findings, this paper contributes to the literature on value-based models of strategy by showing how their underlying logic can be leveraged for empirical research and applications.

Keywords: Value-Based Strategy, Client-Specific Scope Economies, Buyer-Supplier Relationships, Cooperative Game Theory, Maximum Score Estimator

JEL Classification: C14, L23, L84, M10