Competition between SMEs and large firms in a niche market

Abstract

The incursion into niche markets is a strategy that small and medium-sized companies (SMEs) use to consolidate since they avoid competing against large companies (LCs) since niche consumers do not accept mass production from large companies. However, the ability of large companies to generate economies of scale eventually allows them to enter niches as they generate production processes that meet the demands of the niche. Although the saturation of niche markets with competition between SMEs has been analyzed, the impact of an LC on the production and prices of a niche good is not clear when it competes against an SME in the niche market. This article studies the competition for production quantities between an SME and an LC in a niche market through a Cournot-type game where the LC has lower production costs while the demand is characterized by being inelastic and constant. Among our main results, the existence of a single Nash equilibrium stands out when companies compete for quantities. The equilibrium strategies show that, although the LC can increase its production by reducing its costs, the SME concentrates most of the market niche; so, niche consumers are willing to pay high prices for the niche good. Furthermore, the firms' production diminishes as its production costs increase when its costs are higher than the costs of the other firm. Finally, the presence of companies in the market decreases as the price elasticity of demand increases; in other words, the niche market tends to disappear as demand is more price elastic.