An Introduction To Industrial Organization Economics And Competition Law
Decreasing returns to scale or diseconomies of scale implies rising average costs (AC) as the firm’s output and scale increase (Samuelson and Marks). Samuelson, William, and Stephen G Marks. Managerial Economics. 6th ed. Hoboken, NJ: John Wiley and Sons, 2006. Print.
Economies of scale takes place with the growth of the firm. A business faces diseconomies of scale when the management team fails to keep economies of scale in check.Both, internal and external growth can lead to diseconomies of scale and affect the growth of the firm.
Diseconomies takes place when the Transaction cost (TC) of the company rises. Transaction costs refer to the costs involved in market exchange. These include the costs of discovering market prices and the cost of writing and enforcing contracts.(Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993). Firms that have low TC have a better chance at preventing diseconomies of scale and increase the firm’s growth.
Over the decade many opportunities have presented itself and helped drop the transaction cost drastically; firstly the development in technology has helped decrease the cost of communication over the years. With the introduction of the world wide web the method of communication, especially…