June 17, 2016 Reading Time: 2 minutes

The common narrative about small business usually goes in one of two directions. First, many predict doom for “mom and pop” firms in America, arguing small businesses must be protected from giants like Walmart, who can charge lower prices.

The second narrative focuses on the benefits these businesses bring to our economy and communities, stressing the need for consumers to “support” small and local business. Notably gigantic firm American Express, for example, sponsors Small Business Saturday every December, encouraging people to “rally their communities” to shop at local stores.

In reality, small businesses are profit-driven entities in our capitalist economy. While regulatory protection and goodwill from consumers may help on the margin, what small businesses need are working strategies to offer the market something of significant or unique value. In our upcoming July research brief, I will report the results of interviews with successful small business owners, focusing on the competitive advantages of their businesses being small.

We usually think of small size the other way around, focusing on the fact that larger firms can reap the benefits of economies of scale, and ultimately charge lower prices. But there are many things that small businesses often do better than large ones. Large firms must centralize a good deal of decision making, whereas those running small businesses may have a sharper understanding “on the ground” of customers and the workings of the firm.

The most commonly cited asset of small size, across diverse industries such as retail, manufacturing and professional services, is in the selection of the products themselves. All of the owners and managers with whom I spoke discussed the ability to either focus on high product quality or fill a market niche that isn’t served by larger firms. The second most common response was superior customer service—the ability to focus on the quality of long-term customer relationships, and not just the volume of business. Other common responses centered around the ability to be nimble (make fast decisions) and deeper knowledge about local market conditions.

The fact that being small carries some competitive advantages should not minimize the challenges small businesses face. Research has shown, for example, that when big box retailers enter a market, there is significant exit among smaller competing stores. Beyond price competition, owners with whom I spoke cited other drawbacks to small size, including the lack of resources to engage in extensive marketing and difficulties in complying with regulations and tax burdens. Still, it is useful to remember that large firms leave openings in markets that small businesses can successfully fill. Be sure to look for our next research brief in early July for a lot more discussion of how small businesses use their size to their advantage.

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Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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