The effect of number of competitors in SME markets

ABSTRACT

Prior studies presented conflicting findings on the effect of small and medium enterprises (SMEs) concentration on growth rate. A theoretical model of industrial organisation suggested that imperfect competition – having fewer competitors – yields a higher growth rate. This research explores this relationship theoretically and empirically as related to SMEs in Israel. Findings show that having few competitors has a positive significant effect on growth in the number of employees, however, unexpectedly the subsample of SMEs with no competitors did not present any growth advantage. We apply a classic microeconomic analysis and demonstrate the conditions that support this empirical result.

KEYWORDS:

• Israel
• economy
• competition
• Cournot model
• SME markets
• growth

Notes

1. Porter, On Competition, 3–36; and Bradley et al., “The Importance of Slack”, 1071–2.

2. Westhead and Birley, “Employment Growth”, 14; and Freel, “Prediction and Growth”, 20.

3. Shepherd and Wiklund, “Are We Comparing Apples”, 107.

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5. Mueller, Profits in the long run, 50–80. See an example of discussion about profitability and market structure.

6. Baye, “Market Definition and Unilateral”, 646; and Belleflamme and Toulemonde, “Who Benefits from Increased”, 14.

7. Bertoletti et al., “Price-Cost Margins”, 659.

8. Shy, Industrial Organization, 63–68, 97–104.

9. Baye, “Market Definition and Unilateral”, 648–9.

10. Menezes and Quiggin, “More Competitors or More Competition?,” 712–4.

11. Zilberfarb, “From Socialism to Free Market,” 17.

12. Giorno, “Boosting Competition”, 6.

13. Another example of increasing competitiveness rising from the communication sector in fixed broadband Internet, in November 2014 the authorities decided to open-up access to the two existing networks and to modify regulations as was recommended by the OECD.

14. Hazledine, “Price Discrimination Merger Policy,” 996.

15. Hüschelrath, “Detection of Anticompetitive,” 683–721.

16. Beck et al., “Financial and Legal Constraints,” 152.

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19. Ehrenberger et al., “Factors Influencing Innovation,” 80–81.

20. Crick et al., “Competitor Orientation and Value,” 131.

21. Cohen-Almagor, “Israeli Democracy at the Crossroads,” 257.

22. Wang, “What are the Biggest,” 172–5.

23. Ng and Hamilton, “Experiences of High-Growth,” 901.

24. Cerasi et al., “Do Rivals Enhance,” 230.

25. Vives, Oligopoly Pricing, 93 – 112. See, for example, a general discussion regarding the Cournot model.

26. Robson and Bennet, “SME Growth,” 194.

27. Goddard et al., “Determinants of Profitability,” 1272.

28. Yazdanfar and Öhman, “Debt Financing and Firm,” 107.

29. Regression analysis was performed by Stata 14.

30. Shy, Industrial Organization, 97–104.

31. Wang, “What are the Biggest,” 174–5; and Cerasi et al., “Do Rivals Enhance,” 228–43.

32. Bertoletti et al., “Price-Cost Margins,” 654; and Belleflamme and Toulemonde, “Who Benefits from Increased,” 741–51.

33. Hashim & Abdullah, “Development of SMEs,” 193.

34. Hazledine, “Price Discrimination Merger Policy,” 975–98.

35. Hüschelrath, “Detection of Anticompetitive,” 695–96.

Additional information

Notes on contributors

Eli Gimmon

Eli Gimmon is a professor of entrepreneurship and strategy at Tel-Hai College, Israel.

Avishay Aiche is a lecturer in the department of economics, Western Galilee college, Israel.