The Effect of the Development of Large Firms on Society

The Effect of the Development of Large Firms on Society
Many firms choose to expand in size because of the cost and market share benefits the firms can reap. However, the development of large firms may not always be of benefit to consumers, and the advantages and disadvantages will be discussed in the following essay. Because larger firms such as Shell Petrol Station are able to experience internal economies of scale through lower unit costs, many of the cost savings are then passed on to the consumers through lower prices. Hence consumers are then able to enjoy greater consumer surplus, defined as the difference between the maximum price that a buyer is willing to pay for a good or service and the actual price paid. As seen from the diagram below, the marginal cost curve shifts to the right such that the new marginal cost = marginal revenue equilibrium lowers the price and increases the output level compared with the initial equilibrium.
In addition, because larger firms with significant market power have a greater tendency to experience supernormal profits, they have the means and incentives for further innovation to continue improving the quality of their product as well as to develop new products. Consumers will then benefit as they can enjoy a greater variety of, and better quality goods. With goods being produced at a lower cost, there will also be an improvement in technical efficiency, which will help to reduce wastage of resources that can then be put to better use to produce more goods and services for society. Larger firms tend to be more stable and are less vulnerable to economic shocks than smaller firms. This will result in fewer disruptions to workers? jobs and will benefit society, as there will not be a sudden increase in the rate of unemployment. Hence the development of large firms can be to society?s advantage. However, large firms may affect society adversely. For instance, an unregulated private company may, in the process of further expansion, come to dominate the market as a monopoly by buying up smaller firms or driving competitors out of business, resulting in unemployment and less product choice for consumers. This is a form of unfair competition to small firms such as the Singapore Petroleum Company, which might actually be more innovative or adaptable than a larger firm, and thus make a potential contribution to the growth of that particular industry. Once a firm becomes a monopoly or achieves significant market power through the erection and maintenance of barriers to entry, it then becomes a price setter, and can raise the price of the good. A profit maximising firm in this situation is not allocatively efficient, since it does not produce an output where marginal cost equals price, but rather where marginal cost equals marginal revenue. Hence, compared with a firm operating in a competitive industry, it produces a lower output and charges a higher price. This will cause a transfer of consumer surplus from consumers to the producer, and there will also be fewer choices for consumers. Moreover, the producer, facing little or no competition, has little incentive to increase efficiency, and this will lead to misallocation of resources. It is also likely that supernormal profits earned by the large firm will worsen income inequality in the society, with income transferred from consumers and employees to producers and shareholders. Moreover, because large firms operate on a significantly larger scale, market failure may result in negative externalities. Pollution and welfare loss will be the consequences that may arise. Because the firm is large, many people?s rice bowl depends on job opportunities from that firm. So massive unemployment is likely to result if economic conditions become unfavourable and the firm fails. In conclusion, benefits clearly arise from the development of large firms, but it is important to recognise that there may also be a welfare loss, as well as other adverse economic consequences.

The Effect of the Development of Large Firms on Society 9.4 of 10 on the basis of 1613 Review.