Minimum efficient scale (MES) is the output level at which long-run average costs are minimized. MES is at the minimum point on a U-shaped long-run average cost curve (output Q* in Figures 8.3 and 8.4) and at the corner of an L-shaped long-run average cost curve.
Generally speaking, competition is vigorous when MES is low relative to total industry demand. This fact follows from the correspondingly low barriers to entry from capital investment and skilled labor requirements. Competition can be less vigorous when MES is large relative to total industry output because barriers to entry tend to be correspondingly high and can limit the number of potential competitors. When considering the competitive impact of MES, industry size must always be considered. Some industries are large enough to accommodate many effective competitors. In such instances, even though MES is large in an absolute sense, it can be relatively small and allow vigorous competition.
When the cost disadvantage of operating plants that are of less than MES size is modest, there will seldom be serious anticompetitive consequences. The somewhat higher production costs of small producers can be overcome by superior customer service and regional location to cut transport costs and delivery lags. In such instances, significant advantages to large-scale operation have little economic impact. Therefore, the barrier-to-entry effects of MES depend on the size of MES relative to industry demand and the slope of the long-run average cost curve at points of less-than-MES-size operations. Both must be considered.
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