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Competition and firm size
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Competition affects prices, quality and choice. Some firms grow very large; others stay small.
Effects of competition
For consumers: lower prices, more choice, better quality and more innovation.
For firms: pressure to be efficient and innovate, but lower profits.
For the economy: resources are used more efficiently.
However, fierce competition can force firms out of business and cut jobs.
For firms: pressure to be efficient and innovate, but lower profits.
For the economy: resources are used more efficiently.
However, fierce competition can force firms out of business and cut jobs.
Why firms grow
To gain economies of scale, to spread risk over more products or markets, to take over competitors and gain market power.
Growth depends on access to finance and on government regulation (which may block mergers).
Large firms: lower costs and more finance, but can be slow and impersonal.
Growth depends on access to finance and on government regulation (which may block mergers).
Large firms: lower costs and more finance, but can be slow and impersonal.
Why small firms survive
Small market size: some markets are too small for large firms.
Niche markets: specialised products or local services.
Lack of finance to grow.
Entrepreneurs' objectives: some owners want to stay small and keep control.
Small firms can be flexible and offer a personal service.
Niche markets: specialised products or local services.
Lack of finance to grow.
Entrepreneurs' objectives: some owners want to stay small and keep control.
Small firms can be flexible and offer a personal service.
Why might a village have a small independent café but no large chain?
- The local market is small.
- A chain needs high sales to cover its costs.
Answer: The market is too small for a large firm.
Competition brings lower prices, choice, quality and innovation. Firms grow for economies of scale, to spread risk and to take over rivals. Small firms survive in small and niche markets or because owners prefer to stay small.
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