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minimum efficient scale. In contrast, if minimum efficient scale is 5 million

units, the market can support only two firms producing efficiently. Finally, if

average cost declines for all outputs (up to 10 million units), the market may

be able to support only one firm efficiently.

As one might expect, estimates of MES vary widely across industries.^7 For

instance, in the production of sulfuric acid (a standard chemical), the MES

for a plant is about 4 percent of total U.S. consumption. The average cost

disadvantage of producing at one-half of MES is only 1 percent. The clear

implication is that there is ample room in the market for as many as 25

(1/.04) firms. By comparison, the MES for electric motors is about 15 percent

of U.S. consumption, and the cost disadvantage at one-half of MES is 15 per-

cent. For production of commercial aircraft, MES is 10 percent of the U.S.

market, and the cost disadvantage at one-half of MES is 20 percent. This sug-

gests that the industry could support as many as 10 manufacturers.

Economies of scale would not seem to explain why Boeing and Airbus dom-

inate the worldwide market. Rather, the rise of these two aviation giants and

the demise of Lockheed and McDonnell-Douglas more aptly are attributed to

differences in the companies’ management strategies and technological

capabilities.

E-Commerce

and Cost

Economies

As noted in Chapter 3, the Internet and the emergence of e-commerce have

significant impacts on the structure of firm costs.^8 A wide-ranging research

study by Washington’s Brookings Institution estimated that across the whole

of the U.S. economy, the adoption of information technology and e-commerce

methods was producing total annual cost savings of a magnitude equivalent to

about 1 percent of annual gross domestic product. Increased efficiency

stemmed from reengineering the firm’s supply chain and from reducing trans-

actions costs of all kinds. The greatest potential savings emerged in information-

intensive industries such as health care, financial services, education, and

public-sector operations.

Recall that the hallmark of information economics is the presence of

high fixed costs accompanied by low or negligible marginal costs. As a result,

average costs decline sharply with output. The fixed costs of business capital

investments are increasingly found in computers, computing systems such as

(^7) Estimates of plant-level economies of scale for different industries are collected in W. Shepherd
and J. M. Shepherd, The Economics of Industrial Organization(Upper Saddle River, NJ: Prentice Hall,
2003).
(^8) For discussions of e-commerce and cost economies, see G. Ellison and S. F. Ellison, “Lessons about
Markets from the Internet,” Journal of Economic Perspectives(Spring 2005): 139–158; S. Borenstein
and G. Saloner, “Economics and Electronic Commerce,” Journal of Economic Perspectives(Winter
2001): 3–12; and R. E. Litan and A. M. Rivlin, “Projecting the Economic Impact of the Internet,
American Economic Review, Papers and Proceedings (May 2001): 313–317.
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