by: Michael T. Schaper, PhD

as posted by the International Council for Small Business:

Small businesses face an interesting, two-edged sword when dealing with the marketplace. On the one hand, free markets are essential to entrepreneurial success – they provide the means by which new ideas, new products, innovations and original business models can be introduced and, if they are effective enough, succeed.

At the same time, though, SMEs often have less capacity than their larger counterparts to succeed and thrive in an arena of open competition. They have smaller market share, less money, fewer in-house marketing skills and market data, and less access to professional advisers to help them fight back effectively, to name just a few comparative weaknesses (see table).

SMEs Large Firms
Number of business establishments Single Multiple
Geographical distribution Limited Limited or wide
Product/service range Limited Limited or wide
Market share Limited Significant
Customer base Small Numerous
Likelihood of business failure/exit High Low
Knowledge of, and to access to, regulatory information Limited; ad-hoc Sophisticated; extensive
Knowledge of, and to access to, marketplace information Limited; ad-hoc Sophisticated; extensive
Ability to access established supply sources Difficult Easy
Level of financial resources Typically small and limited Substantial
Use of external legal and economic advisers Limited; ad-hoc Systematic; structured

Surprisingly, although it’s an issue that has pre-occupied many economists, there is very limited research into the effect of competition on SMEs.

The limited data published to date seems to suggest some unusual findings as well – for example, most small businesses report that other SMEs are just as much a competitive threat as are large firms. Most SMEs state that they face a moderate-to-high level of challenge from their competitors, but another third seem to face very little competitive tension. And although a reasonable minority (somewhere between a quarter and a third) have had first-hand experience of anti-competitive conduct in their particular industry, most would not bother reporting any such breaches of competition laws to the relevant regulator for action.

Across the world, almost every country today has some form of legal framework for dealing with these competition issues. Amongst other things, there are rules that prohibit the formation of cartels, and which outlaw market-sharing, price-fixing and bid-rigging. There are laws for the vetting of mergers (especially if these might lead to market dominance or a reduction in competition overall), and mechanisms to ensure businesses don’t engage in false or misleading conduct, deceive consumers, or tell untruths.

But it’s not always easy to ensure that the role of small businesses is taken into account. For example, most competition laws treat all businesses (regardless of size) in the same way – which might mean, for example, that a self-employed micro-business owner is bound by the same rules that are designed to deal with the actions of large multinational corporations. SME owners often have little knowledge of what their rights and responsibilities are in this area, and may not have the capacity or the funds to employ legal counsel. Some regulators will enforce the law on behalf of consumers and the general public, but will expect business enterprises to fund their own legal actions when they are the victim of anti-competitive behaviour – which can be difficult if you don’t have a lot of money to begin with.

On the other hand, plenty of SMEs already succeed despite these challenges. They start, grow and succeed and, in the process, are able to effectively overcome all of the obstacles thrown at them by their competitors. For many of them, the relative imbalance in competitive power is just one more issue to deal with, not the determinant of their success or failure.

This produces two interesting questions:

–         Do we need to make special provisions for SMEs – and if so, are there particular “best practice” ways in which we can design laws and regulatory regimes to ensure that they have the best chance of succeeding on their own merits in a fully competitive marketplace?

–         Can more academic research help us to better understand this phenomenon, and to test the impact of different regulatory approaches on small business?

I’d be interested in hearing your opinions

[1] The views expressed in this paper are those of the author only and do not necessarily reflect those of the Australian Competition & Consumer Commission (ACCC) itself.