Introduction
In the context of microeconomics, the concepts of economies of scale, economies of scope and complimentary relationships are three important elements for a business and it’s strategy. The nature of how a business plans production and schedules pricing can be significantly impacted by changes to any of these factors as profitability may hinge on the number of units sold, the diversity of the types of products sold or how other products in the market change.
Economies of scale is the nature of changes to the cost of production for each unit the organization produces. Economies of scale lead to a lower per unit cost within a relevant range when more units of a product are produced based on the allocation of fixed costs with each unit produced. As more units are produced the cost per unit drops as the total variable cost for each product is added to an amount of fixed cost allocated based on the number of units sold. Economies of scope is a cost advantage derived from the sale of various items, not a voluminous amount. Scope is the number of different items that the organization is able to produce using the same equipment and resources, and having a deep level of scope means that the organization is able to do a great deal of different things with the resources that they have. Complementary goods are goods that are in demand because of a relationship they have to another product. When a product or service lowers its price or develops qualities that increase its demand, then the demand for the complementary good will increase (Gibbons and Roberts 23).
Part A
Three firms that have e-economies of scale are Amazon, CarFax and Netflix. This is because the cost of adding a large number of customers to their system will not mean that fixed costs will increase, however the cost per customer will be lower as customers are added. In both cases, there will be greater efficiencies from the use of long-term capital assets such as servers or warehouse space. These costs will not need to change within a relevant range. Both Amazon and Netflix are able to lower their average cost as they continue to add on customers. In the case of Amazon, the firm will not need to build more warehouses for goods unless the relevant range is breached, and at that point, the firm would be heading into a new strata of growth. CarFax makes agreements with car service firms to collect information to sell to customers. The cost fixed cost will likely not grow, and the relevant range for CarFax would likely be much higher than Amazon’s. Netflix agrees to contracts with movie companies and customers sign up for their service. Like CarFax, Netflix forms agreements that will cost relatively the same with any level of activity.
Part B
Two firms that have e-economies of scope would be Google and Yahoo! Both companies are highly diversified. The resources at the basis of the diversification are the same across most of the lines of business that both firms are in. Both Google and Yahoo! operate from servers and the marketing side of their business markets from the same department for all services. The technologies and IP of both firms are developed by staff that develop for a number of different products and services each firm offers.
Part C
Two companies that benefit from complimentary relationships are Apple and Microsoft. Apple sells the iPhone, iPad and iPod. These devices support purchasing music and video from Apple’s iTunes store. Microsoft sells the Surface tablet. MS Office is one software package tat can be purchased for the Surface. When the cost of iPhones, iPads or iPods falls, more people will have the devices, hence, more people will purchase from iTunes. The more people who have a Surface, the more people ho will purchase MS Office.
Works Cited
Gibbons, Robert, and John Roberts. The handbook of organizational economics. Princeton University Press, 2013.
