The Magic Number Seven for Companies in Mature Markets

An economy is a dynamic system where new companies are constantly created, divisions and mergers take place and bankruptcies occur. A theoretical question arises if there is some kind of ’optimum’ or ’final’ steady-state distribution of company sizes or is it all based on random fluctuations? It is shown here that in a closed fixed-size market with only non- diversifying mergers, the stable number of companies is about seven. This is based on simple mathematical relations between clients and product prices. The implication is that when crystallized markets merge into a new common market, as for instance the European Union, many mergers will take place to reach a new equilibrium with seven companies. However, once the new combined market approaches this optimum, all internal incentives for innovation and price lowering are gone from the market.