The Mammoth and the Minnow: A tale of barbellisation in the UK economy

With all the talk of start-ups and self-employment, you’d be forgiven for thinking that the days of the big business are numbered. But as it turns out, they’re undergoing something of a revival themselves.

A quick look at the data from the Inter-Departmental Business Register shows that the two business types with the fastest growing population sizes are those with 0-4 employees and… 1,000 plus employees (see graph below). In other words, it’s the very small firms and the very large ones that are becoming more prominent in our economy. (The IDBR isn't as reliable as the Business Population Estimates, but it gives a more detailed breakdown of the population sizes among larger firm groups).

The research organisation Intuit (based in the US) calls this phenomenon ‘barbellisation’, and has identified several industries where the micro and macro players are dominating the scene. One of their favourite examples is the beer industry, where we’ve seen major companies like SABMiller and Anheuster-Busch merge into global powerhouses at the same time as micro craft breweries grow in number. They've also highlighted this trend in the accountancy, software and movie sectors.

While the RSA has recently argued that the rising number of microbusinesses is to be welcomed, there are concerns that the activity at the other end of the spectrum is leading to firms with disproportionate market power. We all know about the dominance that global behemoths like Amazon, Facebook and Apple have in the tech sector, but evidence suggests that oligopolies are forming in all sorts of industries. According to Maurice Saatchi’s latest report for the CPS, the top 5 companies own 91% of the market share in game software, 89% in the airline industry, 80% in cinema screens and 70% in supermarkets.

These are certainly big numbers, but are they something we should really worry about? In the 1970s the Chicago School economists made a persuasive argument that you need large firms with the economies of scale to compete on the international stage – so much so that they convinced Reagan to redact elements of the US anti-trust laws that prevented mergers. Even Schumpeter writing in the 1930s conceded that monopolies were likely to run efficient operations, since they had to innovate to keep potential rivals out of their markets.

Yet the theory doesn’t seem to bear out in reality. One study of British manufacturing firms from 1968 to 1997, for example, found that they became more innovative as they were forced to compete with international rivals (a period when the UK was entering the EU). On price too, oligopolies appear to exhibit malign effects. An interesting US study found that in 4 out of 5 cases, company mergers resulted in a price hike – from motor oil to brand breakfast cereals. Likewise, mergers in oligopolistic markets have become synonymous with significant job losses. One single takeover by the pharmaceuticals firm Pfizer in 2009 led to 19,000 redundancies.

Recent polling by Populus suggests that more people are becoming attuned to these issues and wary of oligopolistic activity. Nearly half of those surveyed said they believe the public now has more to fear from the conduct of big business than the actions of trade unions, and over 60% that the winner of the next election should be tough on big business. Yet for all these expressed concerns, I do wonder whether we really are aware how much of a presence big business has in our lives. Whereas it is obvious that the banking and energy industries are dominated by a few firms, the same cannot be said of consumer goods – where the likes of Unilever and Proctor and Gamble own vast product ranges under different brand names.

Needless to say, big doesn’t always mean bad. But we should be far more mindful than we currently are of the increasing concentration of power in large firms. In short: keep your eye on the small, but start paying attention to the big.

The RSA and Etsy are exploring similar themes in a new project, The Power of Small.

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