Buyer power vs economies of scale

Hi there,

They are different :)

Economies of scale

Economies of scale is an overarching concept. It means “as I get bigger, my unit costs get smaller”

You can see this when making gadgets (Henry Ford and the Model T) or when providing services (The Internet giants).

It tends to happen when Fixed/Upfront Costs are a large share of total costs

Buyer Power

Buyer power is basically “As I get bigger, I can squeeze my suppliers”. It means I can negotiate lower costs because those suppliers “need” me.

Economies of scale and buyer power both tend to materialize as you get bigger. Buyer power can also contribute to economies of scale. However, they both involve different dynamics/nuances and multiple things affect economies of scale.

Make sense?

Very simply

• Economies of Scale - over time you get better at doing things as you acquire experience & expertise. You can do things at a lower cost and faster pace
• Buyer Power- over time as you grow in experience, expertise & size, you can command better access (often at cheaper rates) to capital, price and other market attributes

For post acquisition synergies, as long as the two entities combine to have similarities, buyer power & economies of scale could increase. But if they are not and operate in different industries such advantages will take some time to develop.

Hi there,

 
depending on the MA, if both companies are in the same industry/product etc. they may achieve greater economy of scale and as the result  increase their purchasing power, but it depends on the MA, let's see an example:

1. Hilton acquire a smaller hotel chain → The smaller chain will likely reduce cost in many areas such as marketing, distribution, including procurement with access to Hilton's procurement agreement. 
2. But if Hilton acquires for example a car rental company, the car rental company will unlikely reduce the cost (of revenue, procurement) as Hilton is not in the same industry. 

All the best,
Lucie

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Good question. You can see the two as 2 different terms,they are not necessarily the same. Buyer power can also mean that there is only one buyer everyone is supplying too, whether or not he operates in economies of scale being irrelevant. He therefore has a lot of power. Buyer power meaning for example a customer's ability to change prices, improve quality, or influence the industry. Economies of scale are their own term, they can reflect increased purchasing power but do not have to. For example economies of scale happen when the average cost per quantity of output decreases as output volume increases.

Economies of scale can be caused by multiple drivers. 

Increased buyer power is one of those drivers. 

There are many other (e.g. increased production efficiency, better ratio of overhead vs. production personnel, pricing power, lower logistic costs, more efficient marketing, eliminantion of redundancies, lower financing costs, …).