authorities will break them up if they become too big.
But while it is not certain whether the positive effects of increased competitive pressure from enforcing anti-trust laws outweigh the negative effects of reduced economies of scale, what can be certain is that free competition will have positive effects. B free competition, I mean removal of legal monopolies or other forms of legal restrictions to competition. This stands in contrast to anti-trust laws which constitute legally coerced competition.
But why should this be different from the issue of anti-trust laws? Couldn’t removal of barriers to competition similarly lead to losses in economies of scale that could to some extent cancel out the positive effect of increased competitive pressures?
No, and the reason for this is that here any reduction in company size will be the result of market processes rather than government fiat. The relevance of this is that smaller companies will only out-compete the larger ones if they have some kind of other advantage that compensates for the lack of economies of scale. For example, Swedish fast food chain Max was able to out-compete its much larger American adversary McDonald’s in Luleå and once also in three other northern Swedish cities: Umeå, Skellefteå and Piteå4, despite the much larger marketing resources of McDonald’s and its bigger distibution chain. This was mostly because Max was much better in touch with the preferences of burger consumers in northern Sweden, something which compensated for the economies of scale advantage of McDonald’s.
Sometimes for various reasons, including cronyism, complacency or out of touch management, large companies do not act as efficiently as they should. In the absence of free competition, that will leave the consumers and the overall economy helpless in terms of the effects of that. But with free competition, independent entrepreneurs unable to get any executive role in the larger company can start business of their own that take advantage of the opening created by incompetence in the larger company.