The Extent of Economies of Scale: The Effects of Firm Size on Labor Productivity and Wage Rates

Abstract

A key policy question in industrial organization is whether growth in firm size should be encouraged or discouraged. Many foreign countries have decided that increases in firm size should be encouraged as a way of lowering the costs of production. The United States has sought to avoid high concentration and the resulting problems of oligopoly by discouraging growth in firm size. The consensus of American specialists in industrial organization is that the economies of scale for most industries are not large once a firm grows to the point where it can operate at least one plant of optimal scale [1, 166-180; 3; 18; 19]. Most of the available research on economies of scale has taken either an engineering or a statistical approach to specific industries, or has attempted to utilize published data for the profit rates of various firms. (Scherer [18, 72-103] gives a good review.) A common problem has been that the available data was for companies whose operations were in a number of different industries, and was limited to those for which financial data was published