A2 Microeconomics Pricing Power
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A2 Microeconomics Pricing Power

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

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

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A2 Microeconomics Pricing Power A2 Microeconomics Pricing Power Presentation Transcript

  • A2 MicroMarket Power, Pricing Strategies, EconomicEfficiency and Welfare
  • Market Share and Market Power Market share is not the same as market power!First-Mover Advantages for Apple?
  • 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?
  • 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%
  • The Reality of Market Power Pricing Power Influence Entry over Barriers regulators Economies Buying of Scale Power Supply Chain Control
  • Industry Leadership Benchmark Businesses Market power is often self-reinforcingProfits to re-invest Habitual consumption
  • Industry Leadership Benchmark Businesses Market power is often self-reinforcingProfits to re-invest Habitual consumption Innovative businesses can disrupt dominance
  • Economic EfficiencyUse efficiency conceptsin all answers
  • 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
  • Dynamic Efficiency
  • Allocative Efficiency – Competition / Pure MonopolyCost & Price Perfectly Competitive Market Entry of S1 new firms P1 S2 drives price P2 D1 lower MC AC Output (Q)
  • Allocative Efficiency – Competition / Pure MonopolyCost & Price Perfectly Competitive Market Entry of S1 new firms P1 S2 drives price P2 D1 lower MC AC P1 P1 Q1 Output (Q)
  • Allocative Efficiency – Competition / Pure MonopolyCost & 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)
  • Allocative Efficiency – Competition / Pure MonopolyCost & 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)
  • Allocative Efficiency – Competition / Pure MonopolyCost & 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
  • 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) Samsung 22% Smartphone Market Share (% of Global Sales, Q3 Nokia 19% 2012) Apple 5% RIM (Blackberry) 2% HTC 4%
  • 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)
  • 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)
  • 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)
  • Smartphones – A Decreasing Cost Industry? Cost & Price External Economies of Scale inExternal economies of scale (EEoS) Smartphone industryWhen the long-term expansion ofan industry leads to thedevelopment of ancillary serviceswhich benefit suppliers in theindustry LRAC1 Output (Q)
  • Smartphones – A Decreasing Cost Industry? Cost & Price External Economies of Scale inExternal economies of scale (EEoS) Smartphone industryWhen the long-term expansion ofan industry leads to thedevelopment of ancillary serviceswhich benefit suppliers in theindustry• 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)
  • Intense competition Emerging MarketsWhat factors other thancost might help to explainwhy average selling pricesof smartphones areexpected to fall by nearly10 per cent in 2013? Substitute Devices Satisficing Behaviour Pricing behaviour often reflects the different strategic objectives of businesses
  • Get help from fellowstudents, teachers andtutor2u on Twitter:#econ3@tutor2u_econ