Economies of scale happen when the average cost of all units declines as the level of activity increases (Linden, 2018). Notably, it does not have to involve production. A company can enjoy this advantage because of high fixed costs, lower input prices caused by high-volume purchasing, or learning economies. Walmart, for instance, buys in bulky to minimize the unit cost of production. Afterward, it sells the same products at the stores at a much lower price than most competitors. Therefore, economies of scale are relevant to large companies such as Walmart. The company has better bargaining power hence can lower goods’ prices and have a profit margin, unlike most small competitors.
The fundamental principle behind Walmart is to sell high volumes at discounted products. Its ability to be the price leader implies that it needs to purchase in large quantities from the suppliers to spread cost and risk among many units. One of Walmart’s strategic activities is its relationships with suppliers and the economies of scale it achieves through hard bargaining (Stankevičiūtė et al., 2012). The average cost of transporting the products is lower than competitors that deal with smaller quantities. The company’s large size – store size and being a large chain – allows it to use economies of scale in gaining a competitive edge over the rivals in prices. The bulky purchases reduce marginal costs of products, allowing the company to purchase even more products and earn immense profits with a lower price than most competitors.
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A vital strategy employed by most giant companies in e-commerce involves the reliance on large store sizes, bulky purchases, and market power to lower the prices of their products and gain a competitive edge over other industry players. Economies of scale can be a good thing or a bad thing in a market. It could aid the expansion of a company. At the same time, it could make the market unfavorable for smaller firms because of predatory pricing and other practices that a firm enjoying economies of scale can use to create entry barriers.
Linden, G. (2018). Economies of scale. The Palgrave Encyclopedia of Strategic Management, 477-479. https://doi.org/10.1057/978-1-137-00772-8_759
Stankevičiūtė, E., Grunda, R., & Bartkus, E. V. (2012). Pursuing a cost leadership strategy and business sustainability objectives: Walmart case study. ECONOMICS AND MANAGEMENT, 17(3). https://doi.org/10.5755/j01.em.17.3.2143