The Economics Of The Brick Cycle and Its Effects on Firm and Industry Structure
d) Costs of Varying Output of Firms
Once oligopolistic markets and multi-works firms exist in the brick industry, the relative price stability they create allows yards to alter the number of bricks they sell, by maintaining in-yard stockpiles. In addition, yards are more able to close temporarily and re-open later. This section, attempts to show how yards that are part of a larger financial unit are able to enjoy some cost advantages over smaller firms when production levels have to be varied in this way.
i) Stockpiling Bricks
The improved price stability present in oligipolistic markets means that firms trading in them, when faced with decreased demand and falling prices, are not forced to try and maintain full capacity by decreasing their prices further. Instead, they will use the “extra” revenue received from the bricks they do sell to finance maintenance of production at full capacity, and then stockpile the bricks they do not sell, such stockpiles are an important source of profits for two reasons:
(1. M & MC. LBC and Ibstock Johnsen. 1983, Para 2. 40).
i) The bricks placed in the stockpile can be considered to be those bricks produced with the lowest marginal costs, for instance those produced between 75% capacity and full capacity. ii) The bricks from the stockpile can be sold off when demands, and therefore prices, are relatively high.
Stockpiles of bricks cost money to build up however. This is equal to the rate of interest on the funds borrowed to pay for the extra bricks which make up the stockpile. As such, the larger the stockpile, the higher this unit cost becomes since the average time each brick spends in the stockpile will increase. If this interest burden is treated as a cost of production, then it will be seen that bricks will no longer be stockpiled when their total cost (average marginal costs + storage costs + interest) exceeds their total expected revenue.
Multi-works firms, particularly those that are part of larger holding companies will be able to stockpile bricks for longer than single-works firms for two reasons: i) The firms represent lower risks to banks (who, because of the risks associated with stockpiling bricks, do not like to finance stockpiles anyway), and are thus able to obtain lower rates of interest in the funds they borrow; for this reason, large firms are able to profitably stockpile bricks for longer. ii) Firms with interests outside the brick industry will be able to use cash flows from these interests to build up stockpiles.
For these reasons, larger firms will be able to continue stockpiling bricks for longer, and thus will make larger profits when an upturn in demand appears. They may also avoid having to temporarily close the plant, and thus save on the associated costs involved in doing so. No estimate as to the size of savings made by larger firms could be made however.
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