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For example, I've never heard of a large lawn-mowing corporation. Phone and computer repairers seem to consist mostly of 1 or two man operations. Wedding planners and photographers seem exclusively to be home businesses.

Why is it that certain types of businesses seem never able to grow into a large company? I'm assuming if it were possible, at least some percentage of lucky or savvy businessmen or women would have found great success.

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That's a very interesting question and there are multiple potential reasons for this.

One reason is that production is simply not efficient at a larger scale. There are diminishing returns to scale: i.e. doubling inputs will result in less than twice the output. This means that two smaller production facilities can be more efficient than one large one.

One way to think about this are kids shoveling snow in winter. Beyond a certain number of kids with shovels they're just going to get in each other's way shoveling the same driveway. Now they could of course split up into two or more groups, these two groups could be one firm or these could be two firms. But what's the rationale for combining these two firms into one? They probably will not economize on any fixed expenses. They need to ring the doorbell, bring their shovels, and ask people whether they wish their driveway to be shoveled. Sure one kid could specialize in negotiating a price and ringing many doorbells and scheduling appointments, but the gains from specialization are probably not such that it's worthwhile. It's not how that "industry" works. You ring, you shovel, and you move on. So there is no good reason for combining. The kid ringing and making appointments is an unnecessary overhead. It's better that he shovels too.

Another reason are the fixed costs of certain regulations. You're probably familiar with the fact that in some jurisdictions firms above a certain size need to provide certain services to their employees. If you're a small firm, then you will incur that fixed costs all at once if you expand over that threshold. You'll have to get your existing employees those services and the new people. These additional fixed costs might not make it worthwhile to hire extra people unless you can be certain that you can expand your business well beyond that.

A third reason is that many people do not want to expand their businesses. They enjoy the work that they do and the extra income is not worth it. They'd have to spend less time doing the work that they enjoy and more time on administrating the work done by others. Effectively this is a change of employment. So you might as well ask why do some people do work A and not work B?

These are three reasons. The reasoning is the same each time though. The benefits of expanding do not justify the costs of expanding in that particular situation. Given that there are many different situations there will be many different reasons why people choose not to expand their business.

Does this answer your question?

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  • $\begingroup$ I think it is generally accepted that non-textbook firms do not have decreasing returns to scale for every output level. Production functions only exhibit DRS above a certain level, otherwise there would be no factories at all, just home workshops. Perhaps you are not including the fixed costs of tools in your analysis. $\endgroup$ – Giskard Apr 29 '17 at 9:00
  • $\begingroup$ When DRS kicks in is an empirical question. One reason for this is that the magnitude of fixed costs is not fixed a priori. But take the kids shoveling the driveway. With ten per driveway there will probably be DRS. That's funny. I remember upvoting, but I suppose my connection is sometimes a bit difficult. $\endgroup$ – Toby Apr 29 '17 at 9:45
  • $\begingroup$ Indeed the "when" of DRS is empirical but your answer does not seem to address why this when is different for different business types. This seems to be at the core of the question. $\endgroup$ – Giskard Apr 29 '17 at 9:52
  • $\begingroup$ A fourth reason could be that the market (demand) is too small. $\endgroup$ – luchonacho Apr 29 '17 at 10:01
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Lawns and snowy drives are not transportable. The further the workers have to travel to work, the lower the profit margin. On the other hand, it is possible to create a big organization with national or international branding and advertising, and economies of scale in purchasing etc, but with a distributed local workforce. One method is to set up a franchise organization, such as Subway, McDonalds, 7-Eleven, etc.

In the UK, that business model is used for some apparently "one or two person" businesses like pest control, locksmiths, etc, where advertising at national level (e.g. on internet search engines) leads potential customers to workers who operate in a relatively small geographical area.

For something like computer repairs, the logic works the other way: how much work is the customer prepared to do, to take the broken device to a repairer? If that involves packaging it securely and using a courier service, are they prepared to take that risk, compared with driving a few miles to a local operation where you can actually talk to the people doing the work?

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  • $\begingroup$ Second this. I have spent basically my whole career working for firms in an industry where we avoid seeking work beyond one road-day out and most of our work is a lot closer to home than that. The cost of sending product and installers farther away makes us unable to compete beyond that range. $\endgroup$ – Loren Pechtel Apr 29 '17 at 19:22
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Sometimes it's just that becoming "big" changes the way the business operates so much that it's hard to recognize.

Computer repairs:

To scale up, you need to lower staff training costs and the number of replacement parts you keep in stock. There are 2 ways I know of that this is done:

  • Become a service provider for a specific brand. Also do the warranty services for them in an entire region. You usually operate under that brand name, not under your own company name.
  • Provide computers and repairs, to businesses. You sell or rent them the PCs, then you do maintenance of the PCs you sold or rented them.

Lawn mowing:

To scale up you provide additional services, until you become a landscaping business.


The other examples, photographer and wedding planner, are more interesting.

If comes down to employees having a strong incentive to start their own business instead of being employees.

These are professionals in a business where skill and experience matters, but where most of the work is done by the same person who is the primary customer contact. In these professions, a strong personal brand has above average value. If you want the same wedding planner Kate had, you usually don't ask for the company who did her wedding, you ask for the person who did her wedding. This makes it relatively easy for her to quit and start her own business - especially considering that startup costs are very low in this business.

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From a Coasian perspective, firms are created when the transaction costs involved in buying certain inputs or hiring certain services from the market are higher than the cost of producing that internally. For example: even though it could hire other firms to do that, a sufficiently large firm might have it's own accounting and legal departments because they can save on a few [million] bucks, even though the main good or service provided by the firm has nothing to do with any of these e.g. Coca-Cola.

The issue with a lawn-mowing company, as I see it, is that it's not worthwhile to produce internally the inputs required for that service. To be able to produce a lawnmower at reasonable cost, you'd have to own a lawnmower factory. And in that case, you'd be better off selling the lawnmowers to people who do lawn-mowing service on their own.

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