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Economies of Scale and Diseconomies of Scale

Mergers and acquisitions are considered a continued source of controversy both in business and politics. However, they are generally important. Size does not necessary determine the success of any business since many mergers fail. Therefore, the ability to understanding when mergers and acquisitions are needed as well as how to mitigate their negative impact on a society becomes of critical value within a globalized age. Based the ideas of economies of scale and diseconomies of scale, a study examines the implications of conducting business under both.

Diseconomies of scale are defined as the forces which cause larger firms and governmental organizations to produce both goods and services at an increased per-unit costs. Studies indicate that they are not commonly known in comparison to what economists have for long understood as the economies of scale. These are defined as the forces that enable larger firms involve in the production of both goods and services at a reduced per-unit costs.


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Short-run and Long-run Costs

The above is an illustration of the short-run average total cost curves as the snapshots of a firm over a period of time commencing at ATC1. It can be analyzed when this firm started-out it was very small and had moderately high unit costs. Therefore, as this firm grew and was capable of producing larger outputs so it shifted to a new average total cost curve that is reflected to be lower than the previous one. Additionally, if this firm continues to grow, it then moves to even lower average total cost curves. This indicates that large firms achieve more cost advantages over their counterparts or smaller rivals.

Diseconomies of scale are considered to be rarer than economies of scale. As a result, they are normally offset by economies of scale which exist within the same business. This becomes hard to decide on which of the two will affect most than the other. In addition, businesses that operate in diseconomies of scale should be a ware that such scales can occur for reasons that are external to a firm. For instance, as a business expands it can put much pressure on its supplies of both the raw materials and labor, and thus raising input prices. On the other hand, economies of scale and its associated scope certainly play a great role. This has become an invariable argument that is put forward by some corporate executives as well as their advisors when a transaction is announced.

A number of scholars have argued that through a combination of two companies, it implies that fewer employees and less capital will be required to serve the new customers’ entity. However, economic research evidences shows that both scale and scope economies have the tendency to become quite small, especially for the large and headline-grabbing mergers, for example, the DaimlerChrysler merger. This implies that large companies usually exploited all the scale advantages long before acquisition made. Additional argument for mergers suggest that the combined entity can be ably involve in innovations activities more and bring some new products and services to the market. This is purposely to benefit consumers and obtain more profits. However, economies of scale have the ability to offset the diseconomies of scale. This is true because if they can not, then most probably no merger activity would be considered important, since it could only contribute to the increase in diseconomies of scale.

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In sum, as companies consider mergers or acquisitions, they need not only to consider the economies of scale which they often have as their underpinned proposed deal, but also take into consideration how to prevent themselves from the diseconomies of scale. Organizations need to plan for their future as well as stay focused on their businesses. Unfortunately, full attention has not been given on these issues by executives and their advisors. As most companies grow through merger, the diseconomies of scale also grow. When the economies of scale, as it is expressed by the synergy estimates, are not comparatively larger than diseconomies of scale, then it becomes apparent that the new company is at its worse off than before the other company is merged. Conversely, if a larger company acquires a smaller company, or if small companies merge, the result is generally positive. This is simply because the dis- functionalities which may be introduced through the diseconomies of scale are comparatively small.

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