Despite the pervasive phenomenon of scale economies the majority of firms has always been small firms. The emergence of small firms as a means of economic development on both sides of the Atlantic has been one of the major new topics of economic policy since the 1980s. This has drawn renewed attention to the question of how small firms are able to exist. The theories of strategic niches and dynamic complementarity imply that small firms seek out markets where they are able to avoid competition with their larger counterparts. In this paper we test the validity of these theories by examining the extent to which small-firm profitability is set by large-firm profitability. We find considerable evidence that the price-cost margins of small firms do not tend to follow those of large firms. This is interpreted as supporting the theories that small firms pursue a strategy of producing in distinct product niches.
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The paper investigates the extent to which small firms' price-cost margins follow those of large firms. A two-equation model is used with data for 36 Dutch three-digit manufacturing industries over the period 1975-86. The effects of market structure characteristics are also examined. The main result is that small firms (10-50 employees) appear to have the freedom to set prices above cost independently of larger firms in the same industry.
This study is concerned with the explanation of differences in price-cost margins of manufacturing industries using a longitudinal data set consisting of averaged data from 66 Dutch industries from 1974 through 1986. Our major concern is investigating whether price-cost margins are more procyclical in concentrated than in unconcentrated industries.The relation between the size of the mark-up of price over marginal cost and the degree of imperfect competition has received considerable attention in the industrial organisation literature. See Cubbin (1988) and Schmalensee (1989) for almost exhaustive surveys of the empirical literature. One of the main indicators of the degree of imperfect competition is seller concentration. The correct measurement of the influence of seller concentration on the size of the mark-up depends on the level of demand pressures (see section 2 for a discussion). This influence can be best measured using a panel data set covering a period including various stages of the business cycle. Recently, Domowitz, Hubbard and Petersen (DHP) presented some related studies focusing on the relationship between seller concentration and price-cost margins during the We like to thank Rene den Hertog for computational assistance and Aad Kleijweg, Dan Kovenock, Keith Cowling, Kees Zeelenberg, David Audretsch, Sjaak Vollebregt, Jan van Dalen, Jeroen Potjes and two anonymous referees for helpful comments.
ABSTRACT. Industrial economists surmise a relation between the size distribution of firms and performance. Usually, attention is focused on the high end of the size distribution. The widely used four-firm seller concentration ratio, C4, ignores what happens at the low end of the size distribution.We investigate to what extent the level and the growth of small business presence influence price-cost margins in Dutch manufacturing. We use a large data set of 66 industries for a thirteen year period. This allows the investigation of both small business influences within a framework in which that of many other market structure variables is also studied. Evidence is shown that price-cost margins are influenced by large firm dominance, growth in small business presence, capital intensity, business cycle, international trade and buyer con-" centration.
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