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Question

Discuss whether small firms can compete successfully against large firms.

Quick Answer:

▶ There are several reasons why small firms can compete successfully against large firms:

Small firms provide a personal service operate in a niche market may be more in touch with consumers may be more adaptable/flexible in response to changes in consumer demand

Small firms may be subsidised by the government which would reduce costs of production allowing small firms to charge lower prices

Small firms may be operating in an industry where economies of scale are not significant or there are diseconomies of scale raising average cost

Small firms may be able to take advantage of external economies of scale reducing average cost

▶ There are several reasons why small firms cannot compete successfully against large firms:

Large firms may benefit from economies of scale enjoy lower average costs example

Large firms may take over small firms may drive small firms out of business by charging lower prices

Large firms may have more market power use barriers to entry drive firms out of the industry by e.g. using predatory pricing

Large firms may be better known have brand loyalty

Large firms may have more finance which may enable them to purchase more efficient capital and spend more on advertising

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