Question

One source of growth is external growth from a merger or acquisition. Often mergers or acquisitions are justified on the basis of the expected benefits from "synergies" created by the merger or acquisition. Economists know these as economies of scale and economies of scope.

The focus of this discussion will be on defining economies of scale and economies of scope, as well as the key differences between the two within the context of a hypothetical scenario of your choice.

Instructions

Select one of the mergers and acquisitions below:

• Sirius XM acquires Pandora.
• The yet to be concluded merger of Sprint, T-Mobile, and Metro PCS.
• The merger of Strayer University and Capella University.
• The Renault–Nissan–Mitsubishi Alliance.

For your chosen scenario, address the following in your discussion post:

• How are the concepts of economies of scope and economies of scale different? How do they differ within the context of your chosen scenario? What are the synergies that come from the economies of scope? What are the synergies that come from the economies of scale?

Answer 1

Economies Of Scale refers to an increase in production over cost advantage in the long-run. Subsequently, as a company increases its production capacity it somehow reduces the average cost of production automatically, yielding more profits for the firm.

Moreover, this controls the price of the goods and services produced and benefits all by increasing its demand,consumption and supply. The economies of scale benefits the larger organisation more than the smaller one's as they acquire all the essential resources and are generally well-equiped to expand the manufacturing units and to enhance the level of output creation.

Economies of Scope refers to the benefits gained by the production of two different set of commodities at the same time. As producing both together is more cost-effective than producing them separately. It simply means that producing one good at a time increases its cost of production and thus, resulting in a higher price level. While production of one good decreases the production cost of another good at the same time.

In both the scenarios the factors of cost-control work efficiently through different styles of production.

Where in the case of Economies of Scale, the cost gets reduced due to an increase in the level of production.

On the other hand, under Economies of Scope, the cost of production falls because more than one type of product is produced at a time through diversification.

Similar things happened in the Renault-Nissan-Mitsubishi Alliance, as in the context of Economies of Scale, all these car manufacturing companies started its more bigger and larger production units together. Thus, producing more on lower average cost, which controlled the price of the cars and raised its demand in the global market. Gradually, it became the leading light/electric vehicle manufacturing group worldwide. The synergies which came out of economies of scale scenario were Renault, Nissan, and Mitsubishi getting merged together and carrying out the production of vehicles on a large scale.

In case of Economies of Scope the Renault- Nissan-Mitsubishi Alliance covered different segments of vehicle manufacturing at the same time, which made them to yield more advantages and benefits as making the process much cost-effective. It also expanded its scope by attracting more automobile companies as investors and partners in the process from all over the world. Therefore, broadening its horizon of car manufacturing and car sales, by extracting more cost benefits and profits. The synergies which came out of economies of scope scenario were manufacturing of light vehicles, electric vehicles, etc, eg,. Nissan Leaf and Renault Zoe.