A2 economics revision presentation on aspects of market power and pricing power

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
Influence
over
regulators
Entry
Barriers
Economies
of Scale
Buying
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
Where price = MC
Productive
Dynamic
Producing at the lowest
point of the
average cost curve
Changes in the
choices available in a
market over time

10. Dynamic Efficiency

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

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

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

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

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

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)
Smartphone
Market Share (% of
Global Sales, Q3
2012)
Samsung 22%
Nokia 19%
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
When economies of scale are
achieved, the profit-maximising
price falls to P2 and output
expands to Q2
P1
MC1
AC1
P2
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
When economies of scale are
achieved, the profit-maximising
price falls to P2 and output
expands to Q2
P1
MC1
AC1
P2
MC2
AC2
C2
AR
Q2
And higher profits for
manufacturers of smartphones!
Supernormal
profit!
MR
Q1
Economies of scale mean lower
prices for consumers
Output (Q)

22. Smartphones – A Decreasing Cost Industry?
Cost & Price
External economies of scale (EEoS)
External Economies of Scale in
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 (EEoS)
External Economies of Scale in
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
labour
• Relocation of key supply
businesses
• Investment in infrastructure
• Links with universities and
other research businesses
LRAC1
LRAC1 with external
economies of scale
Output (Q)

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

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