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Market power and pricing
- 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. 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. 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 Entry Barriers Buying Power Supply Chain Control Economies of Scale Influence over regulators
- 6. Industry Leadership Benchmark Businesses Profits to re-invest Habitual consumption Market power is often self-reinforcing
- 7. Industry Leadership Benchmark Businesses Profits to re-invest Habitual consumption Market power is often self-reinforcing Innovative businesses can disrupt dominance
- 8. Economic Efficiency Use efficiency concepts in all answers
- 9. Main types of economic efficiency Allocative Productive Dynamic Where price = MC Producing at the lowest point of the average cost curve Changes in the choices available in a market over time
- 11. 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
- 12. 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
- 13. 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
- 14. 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 P12 S2
- 15. 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 Profit P>MC Loss of allocative efficiency S2 Monopoly pricing can lead to deadweight loss of consumer welfare
- 17. Aims of Price Discrimination Extra Revenue Higher Profit Improved Cash Flow Use Up Spare Capacity
- 20. Cost & Price Output (Q) Price Discrimination in Action: Segmenting the Market Cost & Price Output (Q) Market A Market B AR MR MR AR LRAC = LRMCLRAC = LRMC
- 21. Cost & Price Output (Q) Price Discrimination in Action: Segmenting the Market Cost & Price Output (Q) Market A Market B AR MR MR AR LRAC = LRMC P1 Q1 LRAC = LRMC
- 22. Cost & Price Output (Q) Price Discrimination in Action: Segmenting the Market Cost & Price Output (Q) Market A Market B AR MR MR AR LRAC = LRMC P1 Q1 LRAC = LRMC Supernormal profit
- 23. Cost & Price Output (Q) Price Discrimination in Action: Segmenting the Market Cost & Price Output (Q) Market A Market B AR MR MR AR LRAC = LRMC P1 Q1 LRAC = LRMC Supernormal profit Q2 Supernormal profit P2 P13
- 24. Cost & Price Output (Q) Price Discrimination in Action: Segmenting the Market Cost & Price Output (Q) Market A Market B AR MR MR AR LRAC = LRMC P1 Q1 LRAC = LRMC Supernormal profit Q2 Supernormal profit P2 P3 P3 prices this group out of the market P3
- 25. Evaluation Question Evaluate the view that a strategy of price discrimination by a producer always works more in the interests of producers rather than consumers and society as a whole
- 26. Pricing in interests of producers Exploitation of the consumer – the majority still pay > marginal cost Extraction of consumer surplus turned into higher producer surplus / profit Possible use as a limit pricing tactic / and a barrier to entry Reinforces the monopoly power / dominance of existing firms
- 27. Pricing in interests of producers Exploitation of the consumer – the majority still pay > marginal cost Extraction of consumer surplus turned into higher producer surplus / profit Possible use as a limit pricing tactic / and a barrier to entry Reinforces the monopoly power / dominance of existing firms
- 28. Pricing in interests of producers Exploitation of the consumer – the majority still pay > marginal cost Extraction of consumer surplus turned into higher producer surplus / profit Possible use as a limit pricing tactic / and a barrier to entry Reinforces the monopoly power / dominance of existing firms
- 29. Pricing in interests of producers Exploitation of the consumer – the majority still pay > marginal cost Extraction of consumer surplus turned into higher producer surplus / profit Possible use as a limit pricing tactic / and a barrier to entry Reinforces the monopoly power / dominance of existing firms
- 30. Evaluation: Counter-arguments Potential for cross subsidy of activities that bring social benefits Making better use of spare capacity Bringing some new consumers into market – otherwise excluded by price Use of monopoly profit for research – this is a stimulus to innovation
- 31. Evaluation: Counter-arguments Potential for cross subsidy of activities that bring social benefits Making better use of spare capacity Bringing some new consumers into market – otherwise excluded by price Use of monopoly profit for research – this is a stimulus to innovation
- 32. Evaluation: Counter-arguments Potential for cross subsidy of activities that bring social benefits Making better use of spare capacity Bringing some new consumers into market – otherwise excluded by price Use of monopoly profit for research – this is a stimulus to innovation
- 33. Evaluation: Counter-arguments Potential for cross subsidy of activities that bring social benefits Making better use of spare capacity Bringing some new consumers into market – otherwise excluded by price Use of monopoly profit for research – this is a stimulus to innovation
- 34. Smart Analysis: Huge market growth P15
- 35. 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.
- 36. Smartphone Market Share (2012) Smartphone Market Share (% of Global Sales, Q3 2012) Samsung 22% Nokia 19% Apple 5% RIM (Blackberry) 2% HTC 4%
- 37. 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
- 38. 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
- 39. 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!
- 40. 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
- 41. 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
- 42. 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
- 43. Get help from fellow students, teachers and tutor2u on Twitter: @tutor2u_econ