The following two sections also involve some economies of scale derived from large groupings, notably the way large firms save on the costs of varying production levels. However, because they derived from the fact that brick demand fluctuates, they need to be mentioned in their own right.
-
Price Stabilizing Effects on Larger Groupings
i) In Perfect Competition
In 3.2, R.S. Bower’s findings on the costs structures of individual industries were investigated. Here, it was concluded that for almost all individual yards in the brick industry, supply was inflexible in the short-to-medium term. Marginal costs were lowest at capacity output, and for this reason, all individual yards in the brick industry would maintain output at this level in the short-term, even if losses were being made. Thus, output of the industry as a whole would therefore be fixed in the short-term, at the sum of the capacities of all individual yards in the industry.
Such inflexible industry supply in the short-term causes prices to be volatile. Indeed, the fixed supply would cause a cobweb cycle to exist in the industry, as each individual yard would have to predict levels of demand in the next time period using levels of demand in the present time period as their main guide.
- Pratten. Economies of Scale in Manufacturing Industry. P. 101.
- M & MC. Building Bricks. 1976, Para 136.
Because long-term demand for the bricks is price inelastic (since it is derived demand) and long-term supply is elastic (it is quite easy to start a new small yard), the cobweb cycle would be an exploding one, with differences between brick demand and brick supply becoming greater in each time period.
The brick industry is therefore unlikely to remain in perfect competition because inherent cost structures in brick plants will lead to volatile prices. Thus, brick markets will naturally degenerate into oligipolistic ones as concentration levels are forced upwards by company failures, produced association and company mergers, all caused by volatile price levels. 1
Company mergers caused by pressure from fluctuating prices would create multi-works firms. The creation of such firms would lead to a much more stable brick price, even without some kind of collective price discipline as described by Bower. 2 This is because multi-works firms as a whole face a different shaped marginal cost curve than do single plant firms. This can be seen for Table 4.2 which shows output and the relative unit costs of LBC’s 22 yards that existed in 1974.
