Demand Fluctuations and Firm Heterogeneit

Document Type

Article

Journal/Book Title/Conference

Journal of Industrial Economics

Volume

41

Publication Date

1993

First Page

51

Last Page

60

Abstract

This paper reports evidence supporting the hypothesis that production flexibility is one of the forces that explain differences in the distribution of firm sizes across industries. Using a data set composed of annual observations on 163 four-digit manufacturing industries over the period 1978-1988, we find a negative relationship between market share and sales variability. This empirical result suggests that large and small firms each have their own efficiency niches. While large firms enjoy the advantage of static production efficiency, the flexible production technologies of small firms enable them to respond better to changing demand conditions.

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