Diseconomies and Size

Marshall believed that the representative firm was indeed growing larger over time, and he attributed this to economies of size: ‘We expect a gradual increase in demand to increase gradually the size and the efficiency of [the] representative firm; and to increase the economies both internal and external which are at its disposal.’1 Marshall saw that ‘continued rivalry is as a rule possible only when none of the rivals has its supply governed by the law of increasing return’2 and warned, consciously doing so under the influence of Cournot (whose work he had read before 1870),3 that, where one firm experienced diminishing costs, ‘its advantage over its rivals would be continually increased until it had driven them out of the field’.4 Yet Marshall did not predict that this would occur — that competition would in industry after industry become less and less perfect until ultimately it collapsed into full monopoly — and one reason might be that he believed a point would be reached ‘beyond which any further increase in size gives little further increase in economy and efficiency’,5 beyond which indeed a business might legitimately even be described as having entered a range of increasing unit or average costs. The hypothesis, in other words, is that Marshall had in mind the celebrated U-shaped cost curve that is so familiar to the first-year student of Marshallian economics; and that it was the inevitability of diminishing after increasing returns (the lull after the storm) that made him moderately complacent about the future of the market system. It is with that hypothesis, together with the possibility of other limits to large size, that we shall be concerned in this chapter.