Economies of Scale

Paper Summary:

This paper explains Alfred Marshall's theory regarding economies of scale, which created a distinction between internal and external economies. The paper explains what is meant by internal and external economies and what factors are responsible for them. The paper then explains why firms tend to benefit from economies of scale and why larger firms are usually in a better position to take advantage of economies of scale. Microsoft is cited as an example of one such firm. In addition, this paper looks at the concept of barriers to entry. The concept is defined in the context of competition, and examples are used to illustrate how barriers work.

From the Paper:

"Economies of scale almost kill competition because it tends to favor larger firms in an industry. Very often large firms would use their competitive and financial advantage to crush competition in the market. This situation arises because of "absolute-capital-requirement effect" (Bain, 1956, p. 55) This means that due to the high level of investment required for reaching the same level as bigger firms, most smaller firms stand to lose when bigger firms create more internal economies of scale."

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