Question

Consider the case of Best Buy, the big box consumer electronics retailer. Best Buy is an

example of a "Category Killer,’ which is a retailer that uses its size to gain a competitive
advantage over smaller retailers and sometimes forces them out of business.

a. Use the concept of economies of scale to explain why this might be the case.
Show the graph of economies of scale to support your answer by comparing Best
Buy to smaller retailers.

b. Discuss how the following might lead to economies of scale for Best Buy:

(1) Indivisible inputs

(2) Any two of the following: purchasing economies, advertising economies,
inventories

c. What is the implication of the existence of economies of scale on the number and
size of firms in this industry?

d. Discuss how economies of scale could serve as a barrier to entry in this case.

e. Discuss the main factor that could cause Best Buy to experience diseconomies
of scale.

f. In addition to consumer electronics, Best Buy also sells appliances. Discuss two
factors that may allow Best Buy to achieve economies of scope in selling both
consumer electronics and appliances.

g. Suppose the cost functions for Best Buy in terms of consumer electronics (X) and
appliances (Y) are as follows:

C (40, 0) = 220 C (0, 10) = 390 C (40, 10) = 550
C (80, 0) = 360 C (0, 20) = 880 C (80, 20) = 1120

Does Best Buy have economies of scale in sale of either consumer electronics or
appliances? Does it have economies of scope?

Answer 1

Best Buy can gain a competitive advantage over smaller retailers by using economies of scale to lower costs per unit in selling consumer electronics and appliances. The main factor that could cause Best Buy to experience diseconomies of scale is inefficiencies in managing a larger operation. Selling both consumer electronics and appliances allows Best Buy to achieve economies of scope by attracting more customers and utilizing existing infrastructure.

Step-by-step explanation:

Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. Best Buy, as a big box consumer electronics retailer, can take advantage of economies of scale to gain a competitive advantage over smaller retailers.

They can purchase inputs in larger quantities, which leads to lower costs per unit. Additionally, their larger inventories and advertising efforts can benefit from economies of scale.

Since Best Buy has economies of scale, it can produce consumer electronics and appliances at a lower cost per unit compared to smaller retailers.

This gives it a competitive advantage and allows it to potentially force smaller retailers out of business. However, if Best Buy were to experience diseconomies of scale, the main factor that could cause this would be inefficiencies and difficulties in managing a larger operation.

Best Buy can achieve economies of scope in selling both consumer electronics and appliances due to its large customer base and infrastructure.

By offering a variety of products, they can attract more customers and reduce costs by utilizing their existing distribution network and marketing efforts.