Size of firm

For every capital good, there must be a definite market in which firms buy and sell that good. It is obvious that this economic law sets a definite maximum to the relative size of any particular firm on the free market. Because of this law, firms cannot merge or cartelize for complete vertical integra­tion of stages or products. Because of this law, there can never be One Big Cartel over the whole economy or mergers until One Big Firm owns all the productive assets in the economy.

... says Rothbard in Man, Economy and State (chapter 9).

Many people wonder how "small" companies can compete in price/quality with the big ones. Do the big ones not have a much larger turn-around, which enables them to buy in bulk and save on prices? Do they not have specialized purchasing departments that can optimize stock and bring down prizes?

Sure they do, but this does simply not tell the whole story. Large companies are often integrated units which "buy and sell" to "themselves". This injects calculation chaos into their structure. Badly managed departments are subsidized by the good ones, but no-one pays attention to this. They "sell" or "buy" from themselves on prices that do not reflect customer preferences. Their "internal market" can be coupled away from the final consumer price.

Small companies, with a focused area of operation, can in many cases out-compete in price and quality.