Big Business

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Big Business is a term used to describe large corporations, in either an individual or collective sense. The term first came into use in a symbolic sense subsequent to the American Civil War, particularly after 1880, in connection with the combination movement that began in American business at that time. Organizations that fall into the category of "big business" include ExxonMobil, Wal-Mart, Google, Microsoft, General Motors, Citigroup and Goldman Sachs.

Contents

History, The Great Merger Movement

From 1895-1905, the United States industry underwent major reorganization that had long term impacts on the structure of businesses. Small firms consolidated into giants with a large market share (see Mergers and acquisitions). These mergers involved mass producers of homogeneous goods that exploited efficiencies of volume production. They were generally capital-intensive with high fixed costs; when demand fell, output would remain steady and prices would fall instead. In theory, these mergers were economically viable in the long run because the largest firm would take the supply decisions of independents as given and set the quasi-monopoly price above the competitive price. In practice, companies faced the challenge of deterring new entrants that would threaten the market share of the dominant firm. One solution to the problem of new entrants to the market was setting a “limit price” at which the dominant firm would make a profit, and the small independent firms would break even. The problem with this however was that the dominant firms would face higher costs than competitors. Other solutions to the new entrant problem included short-term price wars and the creation of entry barriers. Moreover, some companies chose to differentiate their products in order to reduce the price elasticity of demand. They produced high standard products preventing themselves from the "price war" with their competitors. By that, companies could build up their brand and choose the selling price more easily. Furthermore, with such differentiated products, producers would earn profits from high margins, rather than large volumes, which could protect them against short term price wars. In this way, when demand for a product falls due to the effects of the formation of short term cartels, such firms could simply reduce output while maintaining their prices. Since profits for such firms were made on the margin, a decrease in demand would not drastically affect their livelihood. This movement and consolidation formed the foundation for what was later coined as "big business."

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