Economies of scale: factors, effects, and firm merger motivation

¶ … precisely what is meant by economies of scale, Identify factors which give rise to that effect. How important are economies scale in a firm's a motivation to merge?

On an individual level, many consumers are familiar with the concept of buying in bulk, to take advantage of cheaper prices. From a retailer's perspective, economies of scale are even more advantageous, as economies of scale can result in massive cost savings, which can then be passed onto the consumer. Economies of scale thus enable the consumer to buy products at cheaper prices, and for the retailer to pocket a larger profit. As well as buying in bulk, large companies have the advantage of being able to buy the most sophisticated and cutting edge technology available, which can result in further savings in the costs of production. Growing in size also gives the company access to greater specialized and diversified knowledge, as more people come to work at the entity. Economies of scale allow a company to differentiate, given its expanded access to labor, as it can deploy more workers in different specialized facets of the company while still manufacturing its core product. Improved knowledge resources and specialized labor enables a more efficient chain of command and the ability to use operations more effectively to increase production (Heakel 2010).

Economies of scale can thus convey a tremendous advantage for organizations, and can give existing large entities a tremendous advantage over small competitors. It is difficult to secure financing to compete against a major market player; and a small company will frequently have to pay its workers less; cannot buy in bulk; cannot afford or has less access to technological innovations, and is only developing relationships with suppliers and creating an organizational chain of command.

Being a first or early mover in an emerging marketplace for a desirable good or service can help many companies secure an 'economy of scale' advantage. Some examples of such first movers include Coca-Cola and Google. These large entities operating on economies of scale now have an additional advantage given that their brand name is now synonymous with even the generic version of the product they provide -- soda and searching online, respectively. Fast food franchises have a built-in consumer market, so entrepreneurs who are wary of entering the competitive restaurant business independently might choose instead to make use of a franchising option extended by a large company. They can then take advantage of built-in, proven operating methods and supplier relationships, as well as a secure demand base. Thus, being 'big' gives a company the ability to get 'bigger' -- the bigger a company is, and the more well-known and loved its products and services, the better able it is to compete on price, quality and degree specialization, and the less likely competitors are to challenge it dominance.