Monopolies and Economies of Scale

Big Technology

MK: the article talks about the US-specific issues in vaccine roll-out. I’m not going to pass my opinion on the core facts.

  • The well-known concept of “economies of scale” (EoS) is often misunderstood to the detriment of the antitrust authorities and the society as a whole. The core concept is that EoS allow things to be built efficiently and cheaply with increasing returns to scale (i.e., the more you produce, the cheaper a single unit of production is).

  • It’s quite easy, though, to lose a picture of a forest (monopoly) for the trees (efficiencies, scale). [MK: no one in their sane mind will argue that efficiencies are good and inefficiencies may cost the CEO her job. At the same time, the argument for acquiring as much scale as possible for the sake of reducing marginal cost base has to be challenged as it simply justifies the creation of a monopoly.]

  • There’s this little inconvenience of a corporate structure of the monopolistic firm. One has to dig a little deeper than the stock forefront to see if the monopoly is actually capable of delivering the EoS. To give you an example, to the outside observer a firm with several subsidiaries producing substantially similar products (say, spread geographically to make the argument more plausible) may look the same as a single large manufacturer with the same level of sales. The issue arises when one understands that the first configuration has much less EoS than the second one. Having said that, both of them may have the same monopoly power. What’s the difference to the consumer? Price and availability.

  • MK: let me remind you that the EoS is a virtue and a curse: for integrated companies (i.e. involved not just into manufacturing/production, but also wholesale distribution and/or delivery to the end consumer) there’s a certain scale than needs to be achieved for the EoS to deliver positive benefits to the firm and the customers. A large part of the problem is coordination and management overhead.

  • MK: When it comes to service delivery, things become even more tricky. Let’s agree that cost efficiencies can be achieved by (among other ways) by decreasing operational costs for a fixed volume of goods/services (in marketing it’s called a “same for less” pricing strategy) or by delivering more goods/services for the same price (“more for same”). It shouldn’t come as a surprise that the “same for less” approach comes with deteriorating quality and resulting lawsuits eating up into the savings.

  • Back to the article. Matt makes a perfect argument that if in the medical field one has to prioritize this “same for less” cost savings strategy, they can’t possibly focus on the customer [MK: I have a particular burning pet peeve when “patients” are being called “customers”, but I’ll leave it to another time], they have to focus on prioritizing the margins (while being inefficient, see above).

  • EoS also give firms an option to not execute, using the margins to buy out the delivery facilities (shops, outlets, etc) and shutting them down thus reducing competition under the guise of “operational inefficiencies” that can’t be remedied. Again, the underlying core reason that “inefficiencies are bad” completely ignores the fact that not all production and distribution efficiencies result in lower prices to consumers.

  • MK: and no, I’m not a socialist, thanks for asking.

  • Please read the article to see how this all applies to the US vaccination situation.

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