Citation:

Aayush Khaitan "Weathering the Shock: Firm Size, Formality, and the Price–output Trade-off in India's Short-run Response to Cost Increases" International Research Journal of Economics and Management Studies, Vol. 5, No. 9, pp. 58-64, 2026. Crossref. https://doi.org/10.56472/25835238/IRJEMS-V5I9P105

Abstract:

In economic theory, firms facing short-run input cost increases must choose between raising prices and reducing output, depending on demand elasticity and market power. This paper examines how this trade-off operates within India's bifurcated industrial structure, where large formal firms coexist with a vast informal micro-enterprise sector and a 'missing middle' of medium-sized firms. The paper develops six hypotheses on firm responses to cost shocks, focusing on market power, firm size, and formalisation. These are examined through Indian case studies covering energy and coal costs in Tirupur's textile cluster, FMCG and steel price responses, metal price volatility in Moradabad's brassware sector, liquidity constraints among Kanpur's informal leather tanneries, and GST-related effects on footwear producers.cross these cases, market power and formal-sector status emerge as key determinants of adjustment. Large, formal, and oligopolistic firms tend to pass higher costs through to prices while protecting output, whereas small and informal firms, constrained by weak market power, fixed-price contracts, and limited working capital, absorb shocks through output contraction. The paper concludes by highlighting the importance of improved credit access and formalisation support for strengthening the resilience of India's MSME sector.

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Keywords:

Short-run Cost Shocks, Firm Size, Informality, India, Market Structure, Menu Costs, MSMEs, Missing Middle.