This study attempts to answer a simple question: How important are economies of scale in advertising agency operations? Advertising agencies, like most other businesses, are multiple-product firms. An agency's costs may depend on how their clients allocate their advertising budgets across media and there is considerable variation in media mix among agencies. (Sec. II provides some quantitative information on this variation.) Accordingly, we use nonlinear estimation techniques to examine the influences of both scale and media mix on advertising agency costs. We find evidence that scale economies may not be as important as many have argued and that media Nonlinear cost functions are employed to study the effects of scale and client media allocations on advertising agency costs. Over 200 U.S. agencies in 1977 apparently were large enough to exhaust essentially all economies of scale, though very small agencies may have had substantial scale-related cost disadvantages. Agencies' costs seem to be sensitive to the mix of media in which their clients advertise. On average, larger agencies' clients advertise in media that are apparently more profitable for the agencies. Implications for a number of issues in marketing and industrial organization are briefly explored. * We are indebted to James Lattin and, especially, Severein Borenstein for excellent research assistance and to the Ford Motor Company for partial financial support through a grant to M.I.T. Acknowledgement is also due to Harry Darling, Robert Finn, John Hauser, Jerry Hausman, Lew Pringle, Diane Schmalensee, Thomas Stoker, and a referee for helpful comments and discussions. Responsibility for the opinions expressed here and any remaining errors rests solely with us.