Session 2 - Boundaries & contracting-17 (1) - Session 2 Boundaries and Contracting Horizontal boundaries 2 reasons to buy Hold-up problem and 4

Session 2 - Boundaries & contracting-17 (1) - Session 2...

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Session 2: Boundaries and Contracting Horizontal boundaries 2 reasons to buy Hold-up problem and 4 reasons to make Economizing Allocating control rights Tapered integration, alliances & networks Double marginalization & 2-part tariffs Vertical restraints Soft Drink Industry Study BU606 Session 2: Boundaries and contracting 1 of 31
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Production related economies of scale Spreading of fixed costs such as… …plant and equipment costs …especially if large machines are more productive than small machines. …distribution and sales force Lower inventory costs because… …a doubling of outlets doesn’t require doubling inventories to preserve the same stock-out risk provided demand at outlets is uncorrelated because then a firm can transfer stock from low demand outlets to high demand outlets. Properties of processing units are such that… …output is volume-related whereas costs are surface area-related ( cube-square rule ) e.g. beer, steel, warehousing, retailing Note : Surface area does not need to be doubled in order to double volume. Specialisation of variable inputs via the division of labour improves productivity but is only worth it if output is high enough to fully employ the specialized inputs 10 skilled craftsmen make 25 cars 20 assembly line workers make 100 cars BU606 Session 2: Boundaries and contracting 2 of 31
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Economies of scope, Learning curve & Diseconomies of scale Economies of scope …arise when a single technology can be used to produce many products and …the fixed cost of using the technology is reduced with each application e.g. LCD’s: calculators & wristwatches …means that it’s cheaper for … …a firm to add good Y if they also produce good X than if they don’t produce good X Learning curve refers to the reduction in costs due to know how generated by accumulated output. is prevalent when turnover is limited implies that it may pay to expand and forego current profits to earn higher profits later on Diseconomies of scale arise due to Higher labour costs due to disutility & transportation pay, unions Offsetting effect: less turnover poor performance measures & low incentives influence costs …slow information flows Irreproducible factors of production BU606 Session 2: Boundaries and contracting 3 of 31
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BU606 Session 2: Boundaries and contracting 4 of 31
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Non-production related economies of scale & scope Advertising economies of scale arise from… …spreading fixed cost of the ad …paying a lower cost per customer due to … …volume discounts per potential customer …higher number of actual customers per potential customers because there are more outlets where the good is available ( ↑ reach ).
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