Revision presentation on aspects of market power - suitable for A2 micro students

1. A2 Micro
Market Power, Pricing
Strategies, Economic
Efficiency and Welfare

2. Market Share and Market Power
Market share is not the
same as market power!
First-Mover Advantages for Apple?

3. P10
Market Shares in Retail Banking
Personal current accounts 2010 market share (%)
Lloyds TSB / Halifax Bank of Scotland 30
Royal Bank of Scotland Group (RBS) 16
HSBC (including First Direct) 14
Barclays 13
Santander (Abbey, Alliance & Leicester) 12
Nationwide Building Society 7
Co-operative Bank 3
National Australia (Clydesdale & Yorkshire Bank) 2
Source: Office of Fair Trading
5 Firm Concentration Ratio here is?

4. P10
Market Shares in Retail Banking
Personal current accounts 2010 market share (%)
Lloyds TSB / Halifax Bank of Scotland 30
Royal Bank of Scotland Group (RBS) 16
HSBC (including First Direct) 14
Barclays 13
Santander (Abbey, Alliance & Leicester) 12
Nationwide Building Society 7
Co-operative Bank 3
National Australia (Clydesdale & Yorkshire Bank) 2
Source: Office of Fair Trading
5 Firm Concentration Ratio here is? 85%

5. The Reality of Market Power
Pricing
Power
Influence
Entry
over
Barriers
regulators
Economies Buying
of Scale Power
Supply
Chain
Control

6. Industry Leadership Benchmark Businesses
Market power is
often self-reinforcing
Profits to re-invest Habitual consumption

7. Industry Leadership Benchmark Businesses
Market power is
often self-reinforcing
Profits to re-invest Habitual consumption
Innovative businesses
can disrupt dominance

8. Economic Efficiency
Use efficiency concepts
in all answers

9. Main types of economic efficiency
Allocative Productive Dynamic
Producing at the lowest Changes in the
Where price = MC choices available in a
point of the
average cost curve market over time

10. Dynamic Efficiency

11. Allocative Efficiency – Competition / Pure Monopoly
Cost & Price Perfectly Competitive Market
Entry of S1
new firms P1 S2
drives
price P2
D1
lower
MC
AC
Output (Q)

12. Allocative Efficiency – Competition / Pure Monopoly
Cost & Price Perfectly Competitive Market
Entry of S1
new firms P1 S2
drives
price P2
D1
lower
MC
AC
P1 P1
Q1 Output (Q)

13. Allocative Efficiency – Competition / Pure Monopoly
Cost & Price Perfectly Competitive Market Cost & Price Pure Monopoly Market
Entry of S1
new firms P1 S2
drives
price P2
D1
lower
P2
MC MC
AC AC
P1 P1
Monopoly
demand
MR (AR)
Q1 Output (Q) Q2 Output (Q)

14. Allocative Efficiency – Competition / Pure Monopoly
Cost & Price Perfectly Competitive Market Cost & Price Pure Monopoly Market
Entry of S1
new firms P1 S2
drives
price P2
D1
lower
P2
MC MC
AC AC
C2
P1 P1
Monopoly
demand
MR (AR)
Q1 Output (Q) Q2 Output (Q)

15. Allocative Efficiency – Competition / Pure Monopoly
Cost & Price Perfectly Competitive Market Cost & Price Pure Monopoly Market
Monopoly Profit
Entry of S1
new firms P1
P>MC
S2
drives Loss of allocative
price P2 efficiency
D1
lower
P2
MC MC
AC AC
C2
P1 P1
Monopoly
demand
MR (AR)
Q1 Output (Q) Q2 Output (Q)
Monopoly pricing can lead
to deadweight loss of
consumer welfare

16. Smart Analysis: Huge market growth

17. 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.

18. Smartphone Market Share (2012)
Samsung 22%
Smartphone
Market Share (% of
Global Sales, Q3 Nokia 19%
2012)
Apple 5%
RIM
(Blackberry) 2%
HTC 4%

19. Smartphones – A Decreasing Cost Industry?
Cost & Price Internal Economies of Scale
and the Price of Smartphones Profit maximising price when costs
are high is P1 and Q1
P1
MC1
AC1
MC2
AC2
AR
MR
Q1 Output (Q)

20. Smartphones – A Decreasing Cost Industry?
Cost & Price Internal Economies of Scale
and the Price of Smartphones Profit maximising price when costs
are high is P1 and Q1
P1 When economies of scale are
MC1
achieved, the profit-maximising
AC1 price falls to P2 and output
P2
expands to Q2
MC2
AC2
AR
MR
Q1 Q2 Output (Q)

21. Smartphones – A Decreasing Cost Industry?
Cost & Price Internal Economies of Scale
and the Price of Smartphones Profit maximising price when costs
are high is P1 and Q1
P1 When economies of scale are
MC1
achieved, the profit-maximising
AC1 price falls to P2 and output
P2
expands to Q2
MC2
Economies of scale mean lower
AC2 prices for consumers
C2
AR And higher profits for
manufacturers of smartphones!
MR Supernormal
profit!
Q1 Q2 Output (Q)

22. Smartphones – A Decreasing Cost Industry?
Cost & Price External Economies of Scale in
External economies of scale (EEoS) Smartphone industry
When the long-term expansion of
an industry leads to the
development of ancillary services
which benefit suppliers in the
industry
LRAC1
Output (Q)

23. Smartphones – A Decreasing Cost Industry?
Cost & Price External Economies of Scale in
External economies of scale (EEoS) Smartphone industry
When the long-term expansion of
an industry leads to the
development of ancillary services
which benefit suppliers in the
industry
• Industry expertise / skilled
LRAC1
labour
• Relocation of key supply
businesses
• Investment in infrastructure LRAC1 with external
• Links with universities and economies of scale
other research businesses
Output (Q)

24. Intense competition Emerging Markets
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? Substitute Devices Satisficing Behaviour
Pricing behaviour often reflects the different
strategic objectives of businesses

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#econ3
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