7.

7 Growth and survival of firms:

1. The size of firms can vary for a number of reasons, including:

 Entrepreneurial and management skills of the owner(s)
 Market demand for the firm's products or services
 Access to capital and funding
 Competition and market saturation
 Government regulations and policies

2. Internal growth of firms can take two forms: organic growth and diversification.
Organic growth refers to the gradual expansion of a firm's existing products, services,
or markets. This can be achieved through increased efficiency, marketing, and
product development. Diversification refers to the addition of new products,
services, or markets to the firm's portfolio. This can be achieved through research
and development, acquisition of new businesses, or entering into joint ventures.

Examples of firms that have achieved organic growth: Apple, Amazon, Google. Examples of
firms that have achieved diversification: Johnson & Johnson, Procter & Gamble, Coca-Cola.

3. External growth of firms can take the form of integration, which involves the
acquisition or merger of another firm. Horizontal integration refers to the acquisition
of a firm in the same industry or market as the acquiring firm. This results in the
expansion of the acquiring firm's market share. Examples of firms that have achieved
horizontal integration: Microsoft, Walmart, ExxonMobil.

Vertical integration refers to the acquisition of a firm that operates at a different stage in
the production process. Forwards vertical integration involves acquiring a supplier, while
backwards vertical integration involves acquiring a distributor. Examples of forwards vertical
integration: Ford, Nike. Examples of backwards vertical integration: Coca-Cola, PepsiCo.
Conglomerate integration refers to the acquisition of a firm that operates in an unrelated
industry. This results in a diversification of the acquiring firm's portfolio. Examples of
conglomerate integration: Berkshire Hathaway, General Electric, Toshiba.

4. Reasons for integration can include:

 Market power and increased market share
 Improved efficiency and cost savings
 Access to new products, services, or markets
 Reduced competition and increased barriers to entry
 Improved economies of scale

5. The consequences of integration can include:

 Increased market power and market share
 Improved efficiency and cost savings
 Access to new products, services, or markets
 Reduced competition and increased barriers to entry
 Improved economies of scale
  Integration can also lead to increased regulatory scrutiny, cultural conflicts, and loss
of autonomy for the acquired firm.

7.7.4 cartels:

1. Conditions for an effective cartel include:

 Agreed upon market-dominating output levels to limit competition
 Coordinated price setting
 Effective enforcement mechanisms to prevent cheating by members
 Ability to limit entry by new firms into the market

2. Consequences of a cartel can include:

 Increased market power and profits for cartel members
 Higher prices for consumers
 Reduced innovation and competitiveness
 Market instability and reduced market efficiency
 Increased regulatory scrutiny and potential legal consequences for cartel members

Note: Cartels are illegal in many countries, including the United States and the European
Union, due to their negative effects on competition and consumers.

7.7.5 principal–agent problem