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
What are two types of justification for diversification and mergers?
- Efficiency based
- Problematic justifications
What are some efficiency based justifications for diversification
- Economies of scale and scope
- Economising on transaction costs and sharing skills and systems
- Internal capital markets
What are two problematic justifications for diversification?
- Shareholder’s diversification of risk
- Identifying overvalued firms
Mergers that capture economies of scale and scope will:
Improve costs and competitiveness of firms
In a diversified firm, some units generate surplus funds that can be:
Channeled to units that need funds
What does diversification do?
Reduces the firm’s risk and smoothes the earnings stream
When the target firm is in unrelated business, is the acquiring firm likely to value the target correctly?
No
What’s the cost of diversification?
Diversified firms may need elaborate control systems to reward and punish managers
Why might managers prefer growth even when it is unprofitable?
It adds to their social prominence, prestige and political power
How can managers enhance their compensation?
Increasing the size of the firm
