A2 MicroMarket 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

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

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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