,Chapter 2. The Horizontal Boundaries of the Firm
Economies of scale When average cost declines as output
increases.
▪ Minimum Efficient The least amount of production a company
Scale (MES) can achieve while still taking full advantage
of economies of scale in terms of supplies and
costs.
Diseconomies of scale When average costs increases as output
increases.
Economies of scope If a firm achieves savings as it increases the
variety of goods and services it produces.
Indivisibilities An input cannot be scaled down below a
certain minimum size (i.e. airplane seats).
Sources of economies of scale and scope
Economics of density Cost saving that arise within a transportation
network due to greater geographic density of
customers.
Purchasing Purchasing power through bulk buying
invariably leads to discounts.
Advertising Larger firms may enjoy lower advertising
costs per consumer because (1) lower costs of
sending messages per potential consumer and
(2) higher advertising reach.
▪ Umbrella branding A marketing practice involving the use of a
single brand name for the sale of two or more
related products.
Research and development Small firms taking a variety of research
approaches may be more innovative than a
large firm aggressively pursuing a narrow
research agenda.
Physical properties of Often allow firms to expand capacity without
production comparable increases in costs.
▪ Cube-square rule Production capacity is proportional to the
volume of the production vessel. This implies
that as capacity increases, the average cost of
producing at capacity decreases because the
ratio of surface are to volume decreases.
Inventories Inventory cost drive up the AC of the goods
that are actually sold.
, Complementarities Describe synergies among organizational
practices.
Strategic fit The whole of a firm’s strategy exceeds the
sum of the parts of its organizational
processes.
Sources of diseconomies of scale
Labour costs and firm size Larger firms generally pay higher wages and
provide greater benefits.
Spreading specialized Many talented individuals believe that having
resources too thin achieved success in one venue, they can
duplicate it elsewhere.
Bureaucracy Incentives, information flows and cooperation
can suffer in large organization.
Learning curve Advantages that flow from accumulating
experiences and know-how.
Winner’s curse The winner's curse is a tendency for the
winning bid in an auction to exceed
the intrinsic value or true worth of an item.
Because of incomplete information, emotions
or any other number of factors regarding the
item being auctioned, bidders can have a
difficult time determining the item's intrinsic
value. As a result, the largest overestimation
of an item's value ends up winning the
auction.
In this case, being a loser can be seen as a
winner.
Economies of scale When average cost declines as output
increases.
▪ Minimum Efficient The least amount of production a company
Scale (MES) can achieve while still taking full advantage
of economies of scale in terms of supplies and
costs.
Diseconomies of scale When average costs increases as output
increases.
Economies of scope If a firm achieves savings as it increases the
variety of goods and services it produces.
Indivisibilities An input cannot be scaled down below a
certain minimum size (i.e. airplane seats).
Sources of economies of scale and scope
Economics of density Cost saving that arise within a transportation
network due to greater geographic density of
customers.
Purchasing Purchasing power through bulk buying
invariably leads to discounts.
Advertising Larger firms may enjoy lower advertising
costs per consumer because (1) lower costs of
sending messages per potential consumer and
(2) higher advertising reach.
▪ Umbrella branding A marketing practice involving the use of a
single brand name for the sale of two or more
related products.
Research and development Small firms taking a variety of research
approaches may be more innovative than a
large firm aggressively pursuing a narrow
research agenda.
Physical properties of Often allow firms to expand capacity without
production comparable increases in costs.
▪ Cube-square rule Production capacity is proportional to the
volume of the production vessel. This implies
that as capacity increases, the average cost of
producing at capacity decreases because the
ratio of surface are to volume decreases.
Inventories Inventory cost drive up the AC of the goods
that are actually sold.
, Complementarities Describe synergies among organizational
practices.
Strategic fit The whole of a firm’s strategy exceeds the
sum of the parts of its organizational
processes.
Sources of diseconomies of scale
Labour costs and firm size Larger firms generally pay higher wages and
provide greater benefits.
Spreading specialized Many talented individuals believe that having
resources too thin achieved success in one venue, they can
duplicate it elsewhere.
Bureaucracy Incentives, information flows and cooperation
can suffer in large organization.
Learning curve Advantages that flow from accumulating
experiences and know-how.
Winner’s curse The winner's curse is a tendency for the
winning bid in an auction to exceed
the intrinsic value or true worth of an item.
Because of incomplete information, emotions
or any other number of factors regarding the
item being auctioned, bidders can have a
difficult time determining the item's intrinsic
value. As a result, the largest overestimation
of an item's value ends up winning the
auction.
In this case, being a loser can be seen as a
winner.
