Small firm subsistence and market dimensionality

Abstract

In many markets, large and small firms coexist. As large firms can in principle out-compete small ones, the actual presence of the latter asks for an explanation. In ours, we focus on the dimensionality of markets, which can change as a consequence of product innovations, preference elaboration or institutions. We show that increasing market dimensionality substantially enlarges the market periphery relative to the market center, which creates new potential niches for small firms. We thereby provide a parsimonious explanation for small firm subsistence.