Discuss whether large firms or small firms benefit consumers more. (8 marks)
Answers
Answer:
In recent times, the tendency is for product markets to be dominated by large multinational corporations who can benefit from various economies of scale. However, despite this general trend, there are still advantages to being a small firm.
Benefits of being a small firm
Concentrate on niche markets
Small niche markets may have less competition and therefore be more profitable. Moving into a mass market may make competition more intense. Niche markets such as handmade products can have a more price inelastic demand; therefore firms can charge a bigger markup on the marginal cost of production. This enables the firm to be more profitable, despite lower volume.
Small can be a selling point
In some goods like clothes, there could be an advantage to small firms selling top end clothes ranges. A big firm like Primark and M&S may be able to sell clothes cheaper, but, small firms can target the customer who wants an exclusive deal – somebody who wants to stand out from the crowd. Some people prefer a local small coffee shop, rather than visiting a ‘bland’ multinational like Starbucks.
Local profile
Related to the previous point, small local firms can take advantage of their local knowledge and local profile. Consumers gain utility from supporting ‘local small businesses’
Economies of scale are limited in some industries.
In the car industry, there are a small number of relatively big firms as economies of scale are very significant. But, in some industries like coffee shops, economies of scale are relatively insignificant. There may be dis-economies of scale in expanding production. Therefore, it is not a competitive disadvantage to retain low output.
Different business objectives.
Not all firms aim at profit maximisation and increasing market share. Some owners may prefer a business that is manageable and easy to retain control. Expansion may involve listing on the stock exchange which makes you liable to shareholders. If people work in small firms, they may get more joy because they feel in control and have a close connection with customers. Owners may create a business that is also a hobby. Therefore, they would prefer to keep the firm small and avoid spending their time on management and paperwork.
Tax advantages
In the UK there is a VAT threshold of £83,000. Once firms increase turnover above this, they are liable to paying VAT and filing in VAT returns. This can be a disincentive for a firm to grow. Also, as firms grow and employ more workers, it leads to national insurance contributions. For some small business owners, the cost and time of filing tax returns can be as cumbersome as the tax.
Avoid principal-agent problem
In a large firm, owners have to delegate control to managers and workers who may not share the same motivation and goals of maximising interests of the firms. Managers and workers may engage in profit-satisficing – do enough to keep owners happy but then maximise other objectives, such as sales maximisation