Intro and horizontal boundaries Flashcards
What do horizontal boundaries define?
- How much of the total market the firm serves
- What variety of products the firm offers
What are the three reasons size/scope can represent an advantage?
- Market power
- Entry barriers
- Lower unit costs
What are determinants of horizontal boundaries
- Economies of scale
- Economies of scope
- Learning curve
What is Economies of scope?
Cost savings when different goods/services are produced within the same plant/company
What is the learning curve?
Cost advantage from accumulated expertise and knowledge
What are advantages of larger size?
- Less vulnerable to predators
- If scale results in lower AC, this results in competitive advantage
What are three disadvantages of bigger size?
- Loss of control
- Slow information flows
- Potential diseconomies of scale (higher AC) if too large
We can say there are economies of scale when MC:
Is less than AC
What are some reasons for economies of scale
- Fixed costs
- Physical properties of production
- Inventories
- Purchasing power
- Advertising
- Umbrella
What does “indivisibilities” mean?
Certain inputs cannot be scaled down below a minimum size
What are reasons for Diseconomies of scale
- Specialised resources stretched too thin
- Coordination
- Incentives
U shaped cost function shows:
- Average cost declines as fixed costs are spread over larger volumes
- Average costs eventually start increasing as capacity constraints kick in
- U shape implies cost disadvantage for very large firms
If output needs to be increased beyond a point, capital intensive technology may need to be substituted for:
Labour intensive technology
Short run EOS brings:
Cost reduction through better capacity utilisation
Long run EOS brings:
Cost reduction by switching to higher fixed cost
Internal growth strategies involve:
- New product development
- Geographical expansion
External strategies for growth include:
Mergers to exploit inter firm synergies
Economies of scope are present if costs are lower when:
Outputs are produced together rather than separately
What are determinants of learning effects
- Labour efficiency
- Standardization and specialization
- Tech driven learning
- Better use of equipment
If a firm’s objective is short term profit then learning economies:
Might not be fully exploited
Firms use the cash generated by cash cows to exploit the learning economies of:
- Stars
- Question marks
What are diseconomies of scope?
Efficiency lost by producing more than one good compared to two firms producing both separately
What is related diversification?
A multiproduct firm whose products display a high degree of commonality
What is unrelated diversification?
Multiproduct firm whose products disply little or no commonality
