FIRM SIZE AND MARKET BEHAVIOR:  A THEORY OF THEIR RELATIONSHIP


                                      Julian L. Simon

                                   University of Maryland

                                          Abstract


             This  paper explores a connection between firm size and business

        strategy, a link between market structure and market behavior.

             The paper offers proof that the larger is a firm's "custom" (committed

        customers), the greater the propensity to choose additional advertising in

        preference to a price cut.

             The key idea is that the larger the custom, ceteris paribus, the

        larger the number of "attached" customers who will pay more (less) if price

        is increased (decreased), and whose revenue could otherwise be counted on

        at the old price.  In contrast, advertising does not affect revenue from

        the "attached" customers.



        JEL L20 (also L10, M30)

        Key words: size, strategy


             Correspondence to Julian L. Simon, 110 Primrose Street, Chevy Chase,

        Maryland, 20815.  Telephone 301 951 0922.




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              old, long version of abstract, including ref to old propositions


             The aim of this paper is to explore the connection between firm size

        and business strategy, one of the more important links between market

        structure and market behavior.

             The paper offers proof of this set of propositions:  (a) the larger a

        firm's custom, the greater the propensity to choose additional advertising

        in preference to a price cut; (b) the larger the custom, the greater the

        propensity to raise price rather than increase or decrease advertising or

        cut price; (c) the larger the custom, the greater the propensity to reduce

        quality rather than increase advertising or cut price; and (d) the larger

        the custom, the less the propensity to develop cost-increasing quality

        improvements rather than lower price or increase advertising.

             The fundament of the theory is that the larger the custom, ceteris

        paribus, the larger the number of "attached" customers who will pay more

        (less) if price is increased (decreased), and whose revenue could otherwise

        be counted on at the old price.  Advertising does not affect revenue from

        the "attached" customers.  Quality changes are similar in nature to price

        changes in this context.  And the relationship of R&D activities to

        customer depends upon the type of discovery that is sought.






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