Journal of Economic Behavior and Organization 4 (1983) 41-51. North-Holland WHY DO FIRMS PRODUCE MULTIPLE OUTPUTS? PJ. LLOYD* National University of Singapore, Singapore 0511 Received January 1982, final version received November 1982 This paper demonstrates that there are at least three distinct explanations: economies of scope, essential jointness and uncertainty. It also demonstrates that economies of scope may be due to output interactions as well as to sharable inputs and the cost and profit function as usually defined are not the true profit-maximising functions. The supply of inputs and sale of outputs in one production process are organised among several firms and/or plants in order to minimise aggregate production and transaction costs. 1. Introduction Multiple-output production is virtually ubiquitous. It has many implications for the structure and size of firms, competition among firms, and other matters. Why do firms produce multiple outputs? This question is equivalent to another: why are the outputs of the multiple commodities demanded in an' economy partitioned into groups which are produced within firms as the units of production? Recently,' Panzar and Willig (1981) offered an explanation in terms of the economyzing of 'sharable' inputs. They called such economies 'economies of scope'. Teece (1980) reconsidered this explanation in the presence of transaction costs which differ between intra- firm and inter-firm transactions. This paper demonstrates that there are at least three distinct explanations of multiple-output production: economies of scope, essential jointness, and *1 am indebted to a referee and the editor for their constructive criticisms. IHistorically, the question of why firms produce multiple outputs has been addressed [see, for example, Clemens (1951) and Gorts (1962)] but it has not been resolved. Coase (1937) pioneered the answer to the existence of the firm in terms of transactions costs. Although he touched on the problem of multiple-output production Coase (1937, pp. 348-349) later (1972, p. 65) admitted that 'current theory is only concerned with the output of particular products, or a generalised product, and not with the range of products produced by the firm.' In the literature on agricultural science there has long been a discussion of the advantages of intercropping, that is, the simultaneous production of multiple crops. The notions of economies and diseconomies of scope has been recognised in this literature where they are referred to as 'mutual cooperation' and 'mutual inhibition'. Attempts have been made to measure the extent of these economies and diseconomies in different ways. [Willey (1979) provides an extensive bibliography.] 0167-2681/83/$3.00 © 1983, Elsevier Science Publishers B.Y. (North-Holland)