A2 Micro Market Power, Pricing Strategies, Economic Efficiency and Welfare
Market Share and Market Power
Market share is not the same as market power!
First-Mover Advantages for Apple?
Market Shares in Retail BankingPersonal current accounts 2010 market share (%)
Lloyds TSB / Halifax Bank of Scotland 30Royal Bank of Scotland Group (RBS) 16HSBC (including First Direct) 14Barclays 13Santander (Abbey, Alliance & Leicester) 12Nationwide Building Society 7Co-operative Bank 3National Australia (Clydesdale & Yorkshire Bank) 2
Source: Office of Fair Trading
P10
5 Firm Concentration Ratio here is?
Market Shares in Retail BankingPersonal current accounts 2010 market share (%)
Lloyds TSB / Halifax Bank of Scotland 30Royal Bank of Scotland Group (RBS) 16HSBC (including First Direct) 14Barclays 13Santander (Abbey, Alliance & Leicester) 12Nationwide Building Society 7Co-operative Bank 3National Australia (Clydesdale & Yorkshire Bank) 2
Source: Office of Fair Trading
P10
5 Firm Concentration Ratio here is? 85%
The Reality of Market Power
Pricing Power
Entry Barriers
Buying Power
Supply Chain
Control
Economies of Scale
Influence over
regulators
Industry Leadership Benchmark Businesses
Profits to re-invest Habitual consumption
Market power is often self-reinforcing
Industry Leadership Benchmark Businesses
Profits to re-invest Habitual consumption
Market power is often self-reinforcing
Innovative businesses can disrupt dominance
Economic Efficiency
Use efficiency concepts in all answers
Main types of economic efficiency
Allocative Productive DynamicWhere price = MC
Producing at the lowestpoint of the
average cost curve
Changes in thechoices available in a
market over time
Dynamic Efficiency
Cost & Price
Output (Q)
Allocative Efficiency – Competition / Pure Monopoly
Perfectly Competitive Market
S1
D1
P1
P2
Entry of new firms
drives price lower
MC
S2
AC
Cost & Price
Output (Q)
Allocative Efficiency – Competition / Pure Monopoly
Perfectly Competitive Market
S1
D1
P1
P2
Entry of new firms
drives price lower
MC
P1 P1
AC
Q1
S2
Cost & Price
Output (Q)
Allocative Efficiency – Competition / Pure Monopoly
Cost & Price
Output (Q)
Perfectly Competitive Market Pure Monopoly Market
S1
D1
P1
P2
Entry of new firms
drives price lower
AC
MC
AC
MC
Monopoly demand
(AR)MR
P1 P1
Q1 Q2
P2
S2
Cost & Price
Output (Q)
Allocative Efficiency – Competition / Pure Monopoly
Cost & Price
Output (Q)
Perfectly Competitive Market Pure Monopoly Market
S1
D1
P1
P2
Entry of new firms
drives price lower
AC
MC
AC
MC
Monopoly demand
(AR)MR
P1 P1
Q1 Q2
P2
C2
S2
Cost & Price
Output (Q)
Allocative Efficiency – Competition / Pure Monopoly
Cost & Price
Output (Q)
Perfectly Competitive Market Pure Monopoly Market
S1
D1
P1
P2
Entry of new firms
drives price lower
AC
MC
AC
MC
Monopoly demand
(AR)MR
P1 P1
Q1 Q2
P2
C2
Monopoly ProfitP>MCLoss of allocative efficiency
S2
Monopoly pricing can lead to deadweight loss of consumer welfare
Smart Analysis: Huge market growth
Falling prices for smartphones
According to one forecast, the global smartphone market will grow 34 per cent over the next twelve months with sales of 285m units in 2013 but average selling prices of smartphones will fall 9 per cent to $273.
Smartphone Market Share (2012)Smartphone
Market Share (% of Global Sales, Q3
2012)
Samsung 22%
Nokia 19%
Apple 5%
RIM (Blackberry) 2%
HTC 4%
Cost & Price
Output (Q)
Smartphones – A Decreasing Cost Industry?
Internal Economies of Scale and the Price of Smartphones
AC1
AC2
MC1
MC2
AR
MR
Profit maximising price when costs are high is P1 and Q1
P1
Q1
Cost & Price
Output (Q)
Smartphones – A Decreasing Cost Industry?
Internal Economies of Scale and the Price of Smartphones
AC1
AC2
MC1
MC2
AR
MR
Profit maximising price when costs are high is P1 and Q1
When economies of scale are achieved, the profit-maximising price falls to P2 and output expands to Q2
P1
Q1
P2
Q2
Cost & Price
Output (Q)
Smartphones – A Decreasing Cost Industry?
Internal Economies of Scale and the Price of Smartphones
AC1
AC2
MC1
MC2
AR
MR
Profit maximising price when costs are high is P1 and Q1
When economies of scale are achieved, the profit-maximising price falls to P2 and output expands to Q2
Economies of scale mean lower prices for consumers
And higher profits for manufacturers of smartphones!
P1
Q1
P2
Q2
C2
Supernormal profit!
Smartphones – A Decreasing Cost Industry?
Cost & Price
Output (Q)
External Economies of Scale in Smartphone industry
LRAC1
External economies of scale (EEoS)
When the long-term expansion of an industry leads to the development of ancillary services which benefit suppliers in the industry
Smartphones – A Decreasing Cost Industry?
Cost & Price
Output (Q)
External Economies of Scale in Smartphone industry
LRAC1
External economies of scale (EEoS)
When the long-term expansion of an industry leads to the development of ancillary services which benefit suppliers in the industry
• Industry expertise / skilled labour
• Relocation of key supply businesses
• Investment in infrastructure• Links with universities and
other research businesses
LRAC1 with external economies of scale
What factors other than cost might help to explain why average selling prices of smartphones are expected to fall by nearly 10 per cent in 2013?
Intense competition Emerging Markets
Substitute Devices Satisficing Behaviour
Pricing behaviour often reflects the different strategic objectives of businesses
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