This paper reports evidence supporting the hypothesis that production flexibility is one of the forces that explain differences in the distribution of firm sizes across industries. Using a data set composed of annual observations on 163 four-digit manufacturing industries over the period 1978-88, the authors find a negative relationship between market share and sales variability. This empirical result suggests that large and small fir ms each have their own efficiency niches. While large firms enjoy the advantage of static production efficiency, the flexible production technologies of small firms enable them to respond better to changin g demand conditions. Copyright 1993 by Blackwell Publishing Ltd.