I was perusing something the other day about how prices should be determined. In it, it stated the monopolies were not a problem basically (presuming they arise naturally). This leads me to believe austrians do acknowledge the concept of economies of scale, but I have heard rhetoric on other sites/from other people which seems to conradict this: so I wanted to see what the thoughts of everyone here were about it. This actually isnt a trivial question because it has some really profound implications. I have two questions:
Of course they do. They also recognise diseconomies of scale, around which Mises' problem of economic calculation is framed. This means that they realise that each firm has a theoretically optimum size.
Doug French spoke on the diseconomies of scale from the perspective of mergers at the Mises Circle in Houston last year...
Yes. Mises talks about it extensively in Human Action and considers it, and thereby big business, one of the greatest things that capitalism has given to mankind
I go into the concept of de facto vs. de jure monopolies here. This piece goes into more detail, and uses the case of Microsoft as an example.
There is economy of scale, but it is a myth that individual companies have an advantage/disadvantage based on size, which this thread discusses. An additional factor I didn't consider at that time is the mentality explained in Robert Kiyosaki's talk on the cashflow the quadrant.
Caley McKibbin:There is economy of scale, but it is a myth that individual companies have an advantage/disadvantage based on size
That doesn't make any sense.
Once again John, you post some very interesting articles, it is going to take me a while to read over/watch all of them since I work. However, some of the material I have reviewed such as this which seem to support/confuse the position Caley Mckibbin took:
A monopoly in fact cannot ever take advantage of its situation to abuse consumers as long as there is freedom to compete in law. Indeed, as soon as it raises its prices such that its profit rate (that is, the difference between the income and the marginal production cost including investment amortization) are noticeably above the average rate in other industries, then capital will rush into competing firms to leverage such profit opportunities, cancelling any situation of de facto monopoly.
I can certainly understand the reason why he would make that statement if he read the above statement: "cannot take advantage". This statement completely undermines the very idea an economy of scale can exist because it assumes no inherent advantage to size. I have yet to review the rest of the material so ill restrain further comment at this time.
I think what Caley meant is that utilizing economies of scale is not a guaranteed advantage. It works under certain circumstances in certain industries and markets. Just the same not taking advantage of economies of scale in your business does not guarantee poor results either.
Some high price goods that have a high mark up generally won't take advantage of economies of scale. For example, fine art, custom cars etc. While goods that have a low mark up where profit is made based on units sold generally take advantage of economies of scale.
Euralis:this which seem to support/confuse the position Caley Mckibbin took: A monopoly in fact cannot ever take advantage of its situation to abuse consumers as long as there is freedom to compete in law. Indeed, as soon as it raises its prices such that its profit rate (that is, the difference between the income and the marginal production cost including investment amortization) are noticeably above the average rate in other industries, then capital will rush into competing firms to leverage such profit opportunities, cancelling any situation of de facto monopoly. I can certainly understand the reason why he would make that statement if he read the above statement: "cannot take advantage". This statement completely undermines the very idea an economy of scale can exist because it assumes no inherent advantage to size. I have yet to review the rest of the material so ill restrain further comment at this time.
I suppose if he misinterpreted the "cannot take advantage" clause, maybe...but that doesn't change what he said, let alone make it accurate. You'll notice I included basically the same statement you quoted in my own write up here on the forum. I would work with Caley's statement only if you stopped after those first 11 words. You have to read the rest of the statement. "cannot ever take advantage of its situation to abuse consumers". And then it goes on to basically explain how it cannot raise prices to achieve a profit rate significantly above the average across industry.
This says nothing about being more efficient and being able to lower your costs and therefore increasing your profit margin while keeping your prices the same (or even lowering them.)
Indeed, this was an advantage Standard Oil enjoyed (which made everyone better off) because it was able to charge lower prices for the product. Again, I highly encourage you to read my post on this.
Jack Roberts:I think what Caley meant is that utilizing economies of scale is not a guaranteed advantage. It works under certain circumstances in certain industries and markets. Just the same not taking advantage of economies of scale in your business does not guarantee poor results either.
Well that's not what he said. I'm not really interested in constantly pontificating how different what people "really meant" is from what they actually said. I just take people at their word.
(cue someone to come in and tell us words don't have real meanings, anything can mean anything, blah blah blah.)
I explained it in the thread I linked...