International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss

 

Small Firms, their Growth and Product Differentiation
Kimesha Francis, Ralston Henry, Anetheo Jackson, Shaneka Stewart, Darron Thomas

Abstract
This paper investigates a model of endogenous product differentiation between large well established and small newly established firms. Small firms should have greater growth potential than large mature firms whose growth potential tapers off once they reach a certain size relative to the capacity of the market. The small firm with its newness has a product that is typically seen as being of a lower quality than the products of their larger counterparts. The model explores the interaction of product quality, firm size and the growth of small firms. This paper shows that firms choose size (large or small) and they will maintain their decision throughout any stage of the game. Large firms are more efficient at producing quality, therefore, despite a growth rate advantage, small firms remain small. Driving this result is the fact that the payoff from remaining small outweighs the payoff from its growth potential since becoming large is accompanied by heavy costs. This property ensures that the principle of maximal product differentiation is sustained.

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