Organizational Size and Markets

Wouldn't be the first time
That things have gone astray
Now you've thrown it all away
--Bryan Adams

Good discussion by Prof Bylund on organizational size in free markets. Many believe that competitive markets lead to monopoly. In early stages of industrial growth, small firms work hard to out-compete each other thru innovation. As industries mature, however, smaller numbers of firms remain because of mergers and attrition. Scale economies kick in for those still in the game, ultimately leading to monopoly.

Markets must therefore be regulated, so this logic goes, in order to prevent price gouging by large monopolistic firms.

Nobel-laureate Ronald Coase, however, asked the question that flummoxed believers in the above story line. If free markets lead to monopoly, then why isn't there just one gigantic firm that controls everything?

Coase and other theorized that the complexity and inertia that arise as organizational size increases impairs managerial decision-making. Rothbard added that economic calculation gets more difficult in concentrated markets because there is a lack of market prices available to effectively allocate resources.

Increasing organizational size, then, creates dis-economies of scale that work against the benefits of larger size.

Bylund fails to mention another factor that handicaps large-sized firms in competitive markets. Large firm inevitably become more vertically and horizontally integrated, i.e., more diversified. While some economies of scope are possible from diversification, productivity will generally be lower than that of smaller firms that specialize.

Sensing opportunities that larger, slower, less productive incumbents miss, smaller entrepreneurial specialists enter competitive markets and gain share as their superior productivity creates value in the marketplace.

Rather than facilitating large firm monopoly, then, unhampered markets constitute ecosystems of large and small firms cycling away in perpetual competitive struggle.

Which bids the obvious question: If large monopolistic firms are unlikely in free markets, then what situations actually facilitate monopoly?