Why do some firms remain small?

A question from Yahoo! Answers:

Why do some firms remain small?

In the traditional Marshallian framework (homogeneous product + no substantial legal or institutional barriers to expansion), firms remain small only because there are no economies of scale. A good example are gas stations; owning two (or even twenty-two) gas stations gives you no cost advantage.

Obviously, if the assumptions of the basic Marshallian model are broken, firms may remain small for reasons that are related to those assumptions.

For example, car repair is not a homogeneous product because it often involves trust issues (people tend to take their cars to mechanics they trust). As a result, automotive repair businesses are generally small. A related observation is that consolidation and franchising were successful only in more commoditized segments of the repair market (oil change in particular).

An example of legal barriers would be German pharmacies. In Germany, drugstore chains are illegal, so pharmacies remain independently owned and operated and, as a result, generally small.

One institutional barrier is capital availability. Generally speaking, you need capital to grow. But capital is expensive if raised on a small scale (transaction costs are relatively high)…

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