Why are firms getting bigger? Why are we seeing a lot of monopolies/oligapolies and concentration of power?
(obv you can if you disagree with this claim, i would like to see the data for it if you can)
Trying to compare austrian answers vs mainstream econ, leftist..
Fixed costs make it more profitable to scale up a firm. For example, if every business needs to have 100 lawyers and 100 lobbyists to stay in business, then it makes sense to merge several small businesses together to shoulder these costs.
Of course, it turns out that those fixed costs are pure creations of the government.
Do you think that fixed cost/economies of scale is the most important driver of this?
Yes and it is ratcheting up by the day with ever higher mountains of regulations.
Do you have empirical evidence for this?
Haha. Milton Friedman in I think the 80’s compared the stack of papers from some previous time to his present time and other counts have been made by various people. The difference would be best expressed exponentially.
In regard to the financial industry, the bust would have bankrupted Goldman Sachs, Citigroup, BofA, JP Morgan, IAG, etc., but the government bailout saved them from bankruptcy. Furthermore, the government used inflation and money taken from smaller banks to do it. That is one way that certain industries become oligopolized and power is concentrated.
sorry i didn’t really understand you. I don’t mean to be a dick, but if you have a paper that looks at firms and economies of scale and uses that to explain the oligapolies or larger firm sizes in general could you please link it.
agreed so 1 reason is inflation (as re-distributional tool) and 2 government lobbying
I’m not really sure if having the former the CEO of Goldman Sachs, Henry Paulson, as Secretary of the Treasury of the United States government is considered lobbying, but yeah, you are essentially correct.
I thought you meant evidence of regulations inflating.
In reality, there are many different things that determine the size of a firm, but it ultimately comes down to what size is optimum for profitability. If the individual or group of individuals running a firm believe that they will increase their profits by expanding the size of their business, then they will do so, and vice versa. We can then divide the different factors affecting profitability with respect to the size of a firm into two categories: those factors that apply in a free market, and those that only apply in the presence of certain government interventions.
Of the factors that apply to a free market, one of the major ones is the extent to which certain factors of production can be used efficiently. Suppose that a large and expensive piece of machinery is required for a certain type of production, regardless of the amount of production the firm embarks upon. If the firm only produces a small amount of product, the average cost of producing that product is going to be high, because the large cost of the capital equipment necessary for production is averaged over a small number of products. On the other hand, if the firm starts producing a larger amount of product with that same piece of capital equipment, then the average cost starts falling, to a point. Eventually, you reach the limit of the quantity of production for that piece of capital equipment, and to produce further, another piece of this machinery is required. However, when the firm proceeds past that point, average costs jump to a higher level, because of the high costs of two pieces of this capital equipment. And so for a firm to be maximizing profit, it is often beneficial to increase the amount of production in this single firm to the point at which the capacity for the capital equipment needed in production is close to being maximized. Naturally, in complex production processes, many different pieces of capital equipment are necessary, all with their own optimum output capacities, and so this results in uneven production functions. The tendency is definitely towards larger firms.
Another factor that applies in a free market is how the productivity of labor changes as we increase the quantity of production in a certain firm. To a point, the marginal productivity increases at an increasing rate, mostly because an increasing number of workers fills a number of different jobs within the firm necessary for production, and as you increase the number of workers, these workers are able to specialize within the firm and concentrate their acquisition of skills to one task, thereby becoming more productive. Then, once you reach a certain point in increasing the number of workers, the marginal productivity of these laborers starts increasing, but now at a decreasing rate: most of the gains of specialization are used up. And finally, you reach a point where the marginal productivity of labor becomes negative. This occurs, for example, when there are so many workers that it is too crowded to be efficient, as the workers get in the way of the work. Total productivity due to labor decreases when the marginal product of labor is negative, and so it is unprofitable to continue to increase the amount of labor employed past this point.
A third factor which influences the size of firms in a free market is the degree to which hierarchical organization lends itself to higher productivity and efficiency. There are potential gains to be made from having many different individual steps in production coordinated in one organization charged with the proper organization of these different steps in production. For example, the supply of a certain intermediate product in the middle of the production process can be very consistent and dependable for a firm if the firm itself is the supplier of that intermediate product. Once again, however, like the previous factors influencing the size of a firm in a free market, there is a point at which increases in size become unprofitable. For example, past a certain point, a single organization may have too much to organize in one firms production, or they have taken on tasks which they are relatively inefficient at and could be done more effectively by another firm or individual.
Yet another factor that applies in a free market is the degree to which, by expanding production, a firm can expand its control of the price of the product it is producing by taking a larger market share. If by becoming larger, a firm can make higher monopoly prices and yet not lose enough sales to make the increase in price unprofitable, then that firm will seek to become larger, the market permitting. In many cases, a firm in a free market will be rather unsuccessful in this endeavor because a free market includes an absence of government-imposed restrictions on entry into the market, and monopoly prices can be undercut by the entrance of new competitors. There are certain markets, however, in which firms can grow to hold a large market share, such as the market for natural resources. It is also important to note that, when a firm can have a near-monopoly in a free market, the implication is that there are distinct advantages to having a restricted market and higher prices. For natural resources, as an example, their strictly limited supply makes it beneficial for monopoly prices to ensure their efficient use over a very long period of time. We would not want most of the world’s oil burned up in the next 20 years, and monopoly, which is easy to attain over resources that competitors cannot simply produce, is a helpful device for achieving efficiency.
But to answer the question of why firms are getting larger at the present, we most likely need to examine the factors that lie outside the realm of the free market, for the changes which government intervention and regulation can cause to the relative profitability of different firm sizes occur much more often that changes that affect the free market factors, which include changes in the nature of capital equipment used in production, occurring from changes in technology, and in the way information is exchanged on the market, which affects the organization of firms and sometimes the productivity of labor. Government policies can change the structure of the market by the mere passage of a certain bill, as opposed to these long term, more fundamental changes in the nature of our economic production that apply in a free market.
One such factor affecting the sizes of firms that spawns from the government is simply regulation in general. Any regulation that a firm has to comply with typically does not change with respect to the quantity of a good or service that the firm decides to produce. All firms, regardless of size, have to comply, and compliance with these regulations always involves costs of some sort, whether they are legal costs, administrative costs, or technical costs. Therefore, because the cost is fixed, the larger production is, the more this fixed cost is spread out between each unit of product, and thus the average cost of production is lower. This encourages large firm sizes.
Another factor stemming from the government is the way in which large firms which already exist can win, through lobbying, special privileges for their firm from the government that enable them to produce more profitably than their competitors which do not have such privileges from the government. They can win subsidizes, and further regulations which burden their smaller competitors, which makes them larger and makes them more profit at the expense of the consumers (the consumers lose out when governments provide special privileges to certain firms). As an economic system moves towards corporatism, competition and the smaller more recently developed firms that are typical of a dynamic and competitive market all but vanish, and huge corporations that work alongside the government become the typical units of business.
And last but not least, there is of course the “too big to fail” doctrine currently followed by most governments. Once a firm has reached a certain size as a result of the other factors which determine the size of a firm based on its profitability, suddenly people decide that the economic consequences of letting this particular firm fail would be too large because the firm is so large. When this happens, the government steps in whenever the large firm is in trouble in order to protect the economy from the potential results of this firm’s failure. Of course, once a firm is deemed “too big to fail,” a whole host of problems emerges as the firm now has a government guarantee that it will not be allowed to fail, one example of which is that the firm can take on excessive risk with a high probability of failure but large returns if that risk is successful.
These last few reasons seem to explain the recent changes in our economy towards larger and larger firms. Our economic system continually moves farther from the competitive free market model to an entrenched corporatist one of large businesses and corporations working with the government in order to restrict competition and the market, so that they can benefit at the expense of the consumers which they are supposed to have to serve in order to make a profit. This fundamentally undermines our economic system, and it is necessary that we realize why this is so and that we move to stop this process from happening. The restoration of free markets would most likely reduce the average size of firms as large corporations would lose the benefits they receive from big government. But in the present time, we observe that they are growing, along with the size of our government.
It depends on which sector you are looking at. It’s not the same everywhere. To quote the situation I know the best the two largest motorcycle manufacturers in the world, Honda and Yamaha, have actually downsized in the last couple of years. Of course this is a very particular situation: with less disposable income Europeans and Americans are buying less brand new motorcycles, very high entry costs and aging population are reducing the demand for smaller, cheaper vehicles in Europe, the financial situation in Japan is quite bad (and very large companies are “bracing for impact”), there has been a market overproduction in the past five-six years, resulting in very large stocks of unsold vehicles which had to be sent straight to the scrap heap, and finally the two most promising markets, India and China, have very particular legislation, forcing foreign firms to have their vehicles built by local, government-backed, outfits (Hero in India to make but an example). To answer the concentration bit there had been talks in the past few years about either a merger between the Kawasaki and Suzuki motorcycle brands or Kawasaki Heavy Industries taking over the Suzuki brand but this came to nothing. In Europe the situation is slightly different the Piaggio group rescued the Aprilia group (Aprilia, Moto Guzzi and Laverda brands) from bankrupcy. This was a politically orchestrated take over, mostly made to appease the very powerful steel workers unions. The badly administered Cagiva group (Cagiva, Husqvarna, MV Agusta) was cut into bits with Harley Davidson taking over MV Agusta (and now they are desperately looking for a buyer) and BMW taking over Husqvarna. Both were very shady deals: BMW probably acted on political grounds, while the H-D takeover is still somewhat of a mystery since they decided to drop the sports brands completely shortly fater this move. For the rest is business as usual.
I am speaking out of experience here, I am sure others will give their account according to their line of trade. As you can see there’s no “fixed rule” saying that given the present political and economical climate there’s a move towards larger and larger firms in every sector.
An excellent discussion indeed.
I can only add that, to me, the truly fundamental reason is inflation. If you know there’s going to be inflation, then you’ll try to get hold of the newly created money as soon as you can, the idea being of using them before prices start increasing. And since the newly created money is initially handed to banks, the only way to get hold of them is by taking a loan.
Now, a firm that has all this incentive to use credit to expand will indeed expand to a point and later, on the eve of the bust, it will either be left to go bankrupt by the government, or else will be “bailed out”. So a firm either 1) gets bigger by ingesting ever-greater quantities of money stolen from others, 2) government allowing, goes bankrupt when unable to face the loses from investing in unneeded fields or else, 3) by refusing (or being unable) to get hold of the newly created money right away, faces increasing costs (in the form of inflation-driven increasing prices) and thus goes bankrupt all the same. So, given time inflation will leave a firm either in continuous expansion, or else bankrupted.
Note that there’s also a very beneficial political aspect in this purely economic process: the less firms there are, the fewer are the beneficiaries of inflation, thus the greater the gains form each remaining firms.
But I must also add that without inflation, regulation wouldn’t be enough to regimentize the economy, as the government would be well cautious of letting too many SMEs fail, else who will be left to be robbed? So, without inflation, concentration remains confined, while with inflation it cannot be avoided.
Negative real interest rates for businesses of a certain size, they essentially are paid to grow.