Economies of scale

16">[17] In this case, with perfect competition in the output market the long-run equilibrium will involve all firms operating at the minimum point of their long-run average cost curves (i.e., at the borderline between economies and diseconomies of scale).

If, however, the firm is not a perfect competitor in the input markets, then the above conclusions are modified. For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels. Conversely, if the firm is able to get bulk discounts of an input, then it could have economies of scale in some range of output levels even if it has decreasing returns in production in that output range.

The literature assumed that due to the competitive nature of reverse auction, and in order to compensate for lower prices and lower margins, suppliers seek higher volumes to maintain or increase the total revenue. Buyers, in turn, benefit from the lower transaction costs and economies of scale that result from larger volumes. In part as a result, numerous studies have indicated that the procurement volume must be sufficiently high to provide sufficient profits to attract enough suppliers, and provide buyers with enough savings to cover their additional costs.^[18]

However, surprisingly enough, Shalev and Asbjornsen found, in their research based on 139 reverse auctions conducted in the public sector by public sector buyers, that the higher auction volume, or economies of scale, did not lead to better success of the auction. They found that Auction volume did not correlate with competition, nor with the number of bidder, suggesting that auction volume does not promote additional competition. They noted, however, that their data included a wide range of products, and the degree of competition in each market varied significantly, and offer that further research on this issue should be conducted to determine whether these findings remain the same when purchasing the same product for both small and high volumes. Keeping competitive factors constant, increasing auction volume may further increase competition.^[18]

Notes

^
^ Manufacture of specialty grades by small scale producers is a common practice in steel, paper and many commodity industries today. See various industry trade publications.
^ Landes, David. S. (1969). The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, New York: Press Syndicate of the University of Cambridge. p. 470.
^ Chandler Jr., Alfred D. (1993). The Visible Hand: The Management Revolution in American Business. Belknap Press of Harvard University Press.
^ http://s3.amazonaws.com/connected_republic/attachments/33/Why_do_we_believe_in_economy_of_scale.pdf
^ See various estimating guides, such as Means. Also see various engineering economics texts related to plant design and construction, etc.
^ The relationship is rather complex. See engineering texts on heat transfer.
^ Moore, Fredrick T. (May 1959). "Economies of Scale: Some Statistical Evidence".
^ In practice, capital cost estimates are prepared from specifications, budget grade vendor pricing for equipment, general arrangement drawings and materials take-offs from the drawings. This information is then used in cost formulas to arrive at a final detailed estimate.
^ See various estimating guides that publish tables of tasks commonly encountered in building trades with estimates of labor hours and costs per hour for the trade, often with regional pricing.
^ See various engineering handbooks and manufacturers data.
^ Rosenberg, Nathan (1982). Inside the Black Box: Technology and Economics. Cambridge, New York: Cambridge University Press. p. 63.
^ Rosenberg 1982, pp. 127–28
^ Rosenberg, Nathan (1982). Inside the Black Box: Technology and Economics. Cambridge, New York: Cambridge University Press.
^ Gelles, Gregory M.; Mitchell, Douglas W. (1996). "Returns to Scale and Economies of Scale: Further Observations". Journal of Economic Education 27 (3): 259–261.
^
^ Ferguson, C. E. (1969). The Neoclassical Theory of Production & Distribution. London: Cambridge University Press.
^ ^a ^b Shalev, Moshe Eitan; Asbjornsen, Stee (2010). "Electronic Reverse Auctions and the Public Sector – Factors of Success". Journal of Public Procurement 10 (3): 428–452.

References

Silvestre, Joaquim (1987). "Economies and Diseconomies of Scale".

External links

Economies of Scale Definition by The Linux Information Project (LINFO)
Economies of Scale by Economics Online

Microeconomics

Major topics	Aggregation Budget Consumer Convexity and non-convexity Cost Cost–benefit analysis Distribution Deadweight loss Income–consumption curve Duopoly Equilibria Economies of scale Economies of scope Elasticity Exchange Expected utility Externality Firms General equilibrium Household Information Indifference curve Intertemporal choice Marginal cost Market failure Market structure Monopoly Monopsony Oligopoly Preferences Production Profit Public goods Returns to scale Risk aversion Scarcity Shortage Social choice Sunk costs Supply & demand Surplus Uncertainty Utility Welfare

Subfields	Behavioral Business Computational Statistical decision theory Econometrics Experimental Game theory Industrial organization Labor economics Mathematical economics Microfoundations of macroeconomics Managerial Operations research Optimization

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Economies of scale