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Competition between Small and Large Firms

Indonesia’s output is influenced by its factors of production. A production possibility curve diagram can be used to show this relationship between resources and output. Indonesia does have extensive fishing waters but does not actually catch many fish. Most of its fishing firms are small and they compete against much larger foreign firms. These larger foreign firms have been attracted into Indonesia’s waters because of increasing demand for fish. The price elasticity of demand for different types of fish has changed in the last few years.

Discuss whether small firms can compete successfully against large firms.

Category:

Microeconomics

[CIE O level May 2017]

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Answer


Step ➊ : Introduction


In every economy, there are firms of different sizes, most of which compete with each other. Several factors should be taken into consideration when determining whether small firms can compete with large firms such as MNCs.


Step ➋ : Discuss why small firms are able to successfully compete with large firms.


There are several reasons why small firms are able to successfully compete with large firms:

➤ 2.1 There are economic activities where the size of the market is too small to support large firms.

Small firms may be operating in an industry where economies of scale are not significant. For example, a local hairdresser in a small town will not receive a large number of customers and thus does not need to expand.

➤ 2.2 Small firms may offer a personal service as they operate in a niche market and the business may involve specialist skills possessed by very few people.

Small firms may be more in touch with consumers and may be more adaptable and flexible in response to changes in consumer demand . Where the product is a service – e.g., solicitors, accountants, hairdressers, dentists and small shops – the firm will be small in order to offer the customers personal attention for which they will pay a higher price. Large firms are not able to give customers individual attention.

➤ 2.3 Small businesses may receive financial help under government enterprise schemes because of their employment and growth potential.

Small firms which are subsidised by the government are able to reduce costs of production and charge lower prices. This may make them more price-competitive than large firms.

➤ 2.4 Access to technology can be very advantageous to small businesses.

The increased access to technology through the Internet and mobile phones has reduced the optimum size of the business unit and made small businesses more efficient and therefore competitive with larger ones.

➤ 2.5 Small firms may be able to take advantage of external economies of scale.

Small firms can join together and act together as one body to rival bigger competitors. They can benefit the buying power of mass merchandisers by teaming with other businesses, even just for basic supplies. This will allow them to cut down costs and get cheaper inventory.


Step ➌ : Discuss why small firms cannot successfully compete with large firms.


Small firms are however not always able to compete with large firms for several reasons :

➤ 3.1 Large firms may benefit from economies of scale.

Another major advantage that large-scale businesses have is economies of scale. Vendors and suppliers are much more likely to provide discounts to companies that purchase in large quantities. Large firms may thus drive small firms out of business by charging lower prices. Small firms cannot benefit from such advantages.

➤ 3.2 Large firms may carry out predatory pricing.

This is a pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market or create barriers to entry for potential new competitors. Consumers will be more willing to buy from large firms than small firms.

➤ 3.3 Large firms may have a better brand image than small firms.

Large businesses often build brand recognition through social media channels, advertising, and providing a consistently good product or service. Stronger brand recognition can boost a big company’s customer base because consumers will think of these companies first when making purchase decisions. Small firms, on the other hand, cannot afford large advertising costs.

➤ 3.5 Large firms may have more finance than small firms.

Large-scale firms usually have better and cheaper access to borrowed funds than smaller firms. This is because the perceived risk to the lender is lower. Large firms also make more profit. This may enable them to purchase more efficient capital and carry out research and development activities. Small firms do not have resources to invest in research and development.


Step ➍ : Conclude.


To conclude, there are several ways in which small firms can compete successfully with large businesses. Small firms which target a niche market and provide a personalised service will have an advantage over large firms. Some small firms may reduce their costs by joining together to benefit from external economies of scale or by receiving grants by the government. However, it will be more difficult for small firms to compete with large businesses in areas such as retail or the sale of branded products. This is mainly because large companies benefit from economies of scale and can afford large marketing campaigns.

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