roberts@cmr.ncsl.nist.gov (John Roberts) (12/19/89)
>From: swrinde!zaphod.mps.ohio-state.edu!wuarchive!kuhub.cc.ukans.edu!honors@ucsd.edu >Subject: Re: proposed "space-mail" incentive >This is one of the major shortcomings of a pure capitalist, market-based >economy. There are some, possibly a lot, of processes that would make >money at a high level of activity, but that would lose money at a low >level of activity. >Travis Butler Argue ideas, not sources. >University of Kansas, Lawrence honors@kuhub.cc.ukans.edu Economy of scale is *not* specifically tied to a capitalist economy - it applies to almost every area of human endeavor. Because of design costs, the need to develop a skill base, bulk discounts for materials, and (in some cases) promotional costs, it is almost always cheaper per unit to produce many copies of a given item than just a few. Noncapitalist economies may be able to cover up this phenomenon as far as price is concerned, but it is still evident in its effect on productivity. As a very simple example, suppose you have a woodworking shop in your home, and like to build furniture as a hobby. You will almost certainly be able to build ten copies of the same item much more quickly and easily than you would be able to build one each of ten different pieces of furniture. This is especially true if you must also come up with the designs. If you have nine friends with woodworking shops, and each person wants ten pieces of furniture, it makes sense for each craftsman to specialize in a particular type of furniture, if you want to minimize construction time. If you use an accounting system that includes labor costs, savings in construction time represents concrete savings in costs. The usual question in commercial enterprise is not whether there will be economy of scale, but over what range it operates. There are many products for which near-maximum economy is attained at a volume that is a tiny fraction of the total market. Such products can support many suppliers, freely competing with one another. Other products continue to show considerable increase in economy of production up to a volume that is a major portion of the market. In such a market, some of the suppliers tend to increase volume and drive the smaller producers out of the business, until a few large producers control the entire market (an oligopoly). I don't think the potential economy of scale for commercial launches has been established. If it turns out that economy of scale is not significant above a small volume, then the envisioned market with many small launch companies competing with one another will be practical. If, however, there is significant economy at large volumes, then there will be a tendency for only the larger companies to survive, unless the smaller companies are protected by legal measures such as subsidies or guaranteed contracts. Since there are already several large companies in the business, they would have a considerable "head start", provided that they are willing to innovate and compete directly. Once an oligopoly is established, it tends to be self-sustaining, and prices are not controlled by competition quite as effectively as in a market with many suppliers. John Roberts roberts@cmr.ncsl.nist.gov