markets have very low 

barriers to entry=>large numbers of firms exist with each having a low market share – hence the size of
each individual business is likely to be ‘small’ relative to the total market size.
New technology, and the rise of the internet, has reduced start-up costs and other barriers to entry, as well as increase barriers to
exit, making markets more contestable. Given so, the use of hit-and-run strategies enable some entrepreneurs to establish firms just
for the purpose of making short-term (or head-start) profits. They then leave the market once profits fall as new firms enter. It is
likely, therefore, that these firms remain relatively small compared with long-established firms.
More generally, there may be no opportunity for firms to benefit from significant economies of scale. This tends to be true for most
service sector firms, where labour is the dominant factor of production, and technology cannot be effectively employed.
Small firms are often relatively easy to establish, and generally do not require complex rules and procedures to set them up.
Profit maximisation may not be the driving force for all businesses, such as not-for-profit organisations. Hence, remaining small
does not conflict with the profit maximisation objective.
Where monopsony power dominates (as with some transnational companies), the potential for small suppliers to grow is limited
given that powerful buyers can push down the prices of suppliers. This limits the revenue and profits attainable, and hence prevents  
organic growth. This many help explain why small suppliers to large supermarket chains and other large retailers may operate at or
just below normal profit, hence scope for expansion is limited.
Some markets may have limited potential for growth, including niche markets which provide specialist or customised services.
Government assistance and state aid in the form of subsidies, grants, tax incentives and relief, and guarantees also enable some
small firms to survive.
Diseconomies of scale may set-in early for certain types of firm, especially those in the service sector, where significant problems
can be experienced as they grow, including difficulties with communication, financing, and employing and training labour.
Benefits of being a small firm
Concentrate on niche markets
Small niche markets may have less competition and therefore be more profitable. Moving into a mass market may make competition more intense. Niche markets such
as handmade products can have a more price inelastic demand; therefore firms can charge a bigger markup on the marginal cost of production. This enables the firm to
be more profitable, despite lower volume.
Small can be a selling point
In some goods like clothes, there could be an advantage to small firms selling top end clothes ranges. A big firm like Primark and M&S may be able to sell clothes
cheaper, but, small firms can target the customer who wants an exclusive deal – somebody who wants to stand out from the crowd. Some people prefer a local small
coffee shop, rather than visiting a ‘bland’ multinational like Starbucks.
Local profile
Related to the previous point, small local firms can take advantage of their local knowledge and local profile. Consumers gain utility from supporting ‘local small
businesses’
Economies of scale are limited in some industries.
In the car industry, there are a small number of relatively big firms as economies of scale are very significant. But, in some industries like coffee shops, economies of
scale are relatively insignificant. There may be dis-economies of scale in expanding production. Therefore, it is not a competitive disadvantage to retain low output.
Different business objectives.
Not all firms aim at profit maximisation and increasing market share. Some owners may prefer a business that is manageable and easy to retain control. Expansion may
involve listing on the stock exchange which makes you liable to shareholders. If people work in small firms, they may get more joy because they feel in control and
have a close connection with customers. Owners may create a business that is also a hobby. Therefore, they would prefer to keep the firm small and avoid spending
their time on management and paperwork.
Tax advantages
In the UK there is a VAT threshold of £83,000. Once firms increase turnover above this, they are liable to paying VAT and filing in VAT returns. This can be a
disincentive for a firm to grow. Also, as firms grow and employ more workers, it leads to national insurance contributions. For some small business owners, the cost
and time of filing tax returns can be as cumbersome as the tax.
Avoid principal-agent problem
In a large firm, owners have to delegate control to managers and workers who may not share the same motivation and goals of maximising interests of the firms.
Managers and workers may engage in profit-satisficing – do enough to keep owners happy but then maximise other objectives, such as sales maximisation
Benefits to consumer of using small firms
Personal touch. A small firm can give greater personal contact with customers.
Individuality. Multinationals tend to standardise service and types of goods. This is more efficient and cost-effective but
can lead to feelings of similarity. For example, a local coffee shop can express a greater individuality than a Starbucks;
the Starbucks layout and drinks will follow a tried and tested formula. But, consumers can grow tired of ‘another chain-
store’ experience.
New ideas. New innovative ideas often start with small businesses just beginning to start. Google and Microsoft both
started as small enterprises in someone’s garden. Working for themselves, entrepreneurs are able to think outside the box.
Avoid paying VAT. Using a small firm to erect a fence, can lead to a lower price than a large firm who have to charge
VAT on top of their bill.
Small firms will need to impress. With a small firm, the person you deal with is likely to be the owner and therefore, they
have a vested interest in offering you the best service. In a large firm, there can be a separation of ownership and control.
WIth owners employing workers and managers who may not share the same ideals.
Disadvantages of small firms
Less efficient than big firms. Big firms can benefit from economies of scale in production and sell at lower cost
Lack of resources. Small firms do not have resources to invest in research and development and bring to market
Small firms may lack access to supply chains and retail outlets. For example, big supermarkets may not want to deal
with small suppliers.
Lack brand awareness. Consumers may prefer to use a well-known brand as they can be sure of the quality and not
worry about getting an unexpected experience