Scale, Scope and Performance

How scale and scope affect firm performance, and implications for the boundaries of the firm, are central questions in economics. Assessing these effects empirically, however, has proved difficult. We argue that because franchised chains are fundamentally single-product entities, we can use data on franchised chains and their parents to distinguish scale and scope effects. After controlling for chain unobserved heterogeneity via fixed effects, we find a robust evidence of positive scale effects within a chain, suggesting positive spillovers from being large. For parent company scope, i.e. firm-level product variety, which we measure by the number of other chains of the parent, we find no effect on sales per outlet, and a negative effect on the number of outlets in the chain. Finally, a change in parent company has no effect on sales per outlet, but reduces the numbers of outlets of the target chain in the following years. We conclude that increasing scale is beneficial to chains, and thus firms, but multi-chain parents seem to engage in rationalization to reduce competition among their chains/products.