Aspects of Market Power. Topic 3.3.9

Transcription

1 Aspects of Market Power Topic 3.3.9

2 What is meant by market power? Market power occurs when businesses can influence market price without losing a high proportion of sales When there are only a few close substitutes in a market then the cross price elasticity of demand (Xed) will be low This allows established businesses to set higher prices and achieve increased supernormal profits Barriers to entry and exit then help to sustain market power of existing firms in the long run and allow abnormal profits to be sustained

3 Box office revenue of most successful movies of all time Revenue in million U.S. dollars Avatar Titanic Jurassic World Marvel's The Avengers Furious 7 Avengers : Age of Ultron Harry Potter and the Deathly Hallows (Part II) Frozen Iron Man 3 Minions Transformers 3 Lord of the Rings Return of the King James Bond- Skyfall Transformers 4 Age of Extinction The Dark Knight Rises 1, , , , , , , , , , , , , , ,781.51

4 Revenue of sports betting companies in 2014 Revenue in billion U.S. dollars William Hill 2.5 bet Ladbrokes 1.82 Paddy Power 1.07 bwin 0.74 betfair 0.73 Unibet 0.48

5 Average revenue: Average UK cinema ticket price 8 Price in

6 Airlines with highest ancillary revenue Ancillary revenue as a share of total 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Spirit 38.7% Wizz Air Allegiant 33.7% 32.4% Jet2.com 28.5% Ryanair TigerAir Jetstar Flybe Air Asia X Volaris 24.6% 21.8% 20.8% 20.7% 20% 19.5%

7 Market Concentration: UK Gas Supply Market share in 2014 (per cent) 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% British Gas 35% E.ON 16% npower Scottish Power 10% 10% EDF 8% Southern Energy 6% SSE Scottish Hydro Swalec First Utility Sainsburys Energy Co-operative Energy Ecotricity Don't know 3% 2% 2% 1% 1% 1% 1% 2%

8 Leading Companies in the World (Profit) Profit in billion U.S. dollars Vodafone Group Industrial & Commercial Bank of China Apple China Construction Bank Exxon Mobil Agricultural Bank of China Bank of China Wells Fargo Microsoft JP Morgan Chase Samsung Electronics Berkshire Hathaway Chevron China Mobile Toyota Motor

9 Leading Employers in the World in 2014 Number of employees Wal-Mart Stores Hon Hai Precision Industry Volkswagen Yum! Brands PetroChina Compass Group Tesco Agricultural Bank of China China Construction Bank Deutsche Post Industrial & Commercial Bank of China Gazprom McDonald's Kroger IBM 592, , , , , , , , , , , , ,592 1,290,000 2,200,000

10 Closing Down Number of Pubs in UK Number of pubs in thousands

11 Ten Key Factors affecting Profitability 1. Growth of demand and the average price that sellers can achieve 2. Scale of installed customer base much cheaper to sell to an existing active customer than the marketing cost of selling to new buyers 3. Changes in business operating costs e.g. wages, prices of essential raw materials and components 4. Changes in the efficiency of factor resources e.g. improvements in labour productivity lead to lower unit costs and therefore higher profits for a given selling price 5. The effects of economies of scale to lower unit costs in the long run and therefore increase profitability 6. Impact of intervention in markets by the government that can affect profitability e.g. a minimum carbon price, the congestion charge 7. The cost of meeting government regulations such as EU legislation 8. Impact of government subsidies / tax relief / investment allowances 9. Strategic behaviour by other firms in the market e.g. short-term price wars might lead to a cut in profits 10. Effects of changes in exchange rates affecting the profitability of exporting and the relative prices of imports

12 Profits Are Higher with Inelastic Demand P1 MC Supernormal Profit AC C1 Price and Cost MR AR Profit Max: MC=MR Q1 Output

13 Barriers to Entry in Markets Monopolistic markets have entry barriers They are any obstacle used to prevent new firms entering an industry They can block potential entrants from making a supernormal profit This protects the monopoly power of existing firms. And. Maintains supernormal profits in the long run Barriers to entry make a market less contestable They lead to highly concentrated markets in the long run

14 Willingness to change main supplier Share of consumers agreeing 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Internet provider 59.4% Banking 55.9% Gas firm 55.2% Electricity firm 51.3% Mobile phone service provider 41.8% Retail 33.6% Restaurants Coffee shops 21.7% 20.2% Consumer willingness to change main supplier or service provider currently used in the United Kingdom (UK) in 2016, by sector

15 Anti-Competitive Behaviour Price fixing and market sharing Dumping and limit pricing to reduce competition Charging excessively high prices Refusal to deal / discrimination Patent misuse Protectionist policies acting as a barrier to international trade

16 Predatory Pricing According to the OECD, predatory pricing is defined as follows: Predatory pricing is a deliberate strategy of driving competitors out of the market by setting very low prices or selling below AVC. Once existing firms have been driven out and entry of new firms deterred it can raise price. Key evaluation: Predatory pricing is illegal under the competition laws of most countries but is very difficult to prove.

17 Limit Pricing According to the OECD, limit pricing is defined as follows: Limit pricing is pricing by the incumbent firm(s) to deter entry or the expansion of fringe firms. The limit price is below the short run profit maximising price but above the competitive level Limit pricing means a short run departure from profit maximisation. If successful, businesses can maintain their market power and make higher profits in the long term.

18 Global Market Share & Entry Barriers 100.0% 90.0% Worldwide market share of leading search engines: Jan Oct % 70.0% Google Yahoo! bing Baidu Market share 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Jan '10 Apr '10 Jul '10 Oct '10 Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct' 12 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15