Besanko table 58 for the 1970s there was a

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Unformatted text preview: arket Share and Profitability 2.6.3 Scale, Scope, and Market Structure When economies of scale or scope exist, but only some firms have been able to exploit them, one would expect to find a positive correlation between a firm’s market share and its profitability. Market structure refers to the number and size distribution of the firms in a market. Market Share ROS _ ______________________ < 10% –0.16% 10%–20% 3.42% 20%–30% 4.84 30%–40% 7.60% >40% 13.16% _ ______________________ Relationship Between Market Share and Pre-Tax Profit as Percentage of Sale (ROS). (Besanko Table 5.8) For the 1970s, there was a correlation between market share and profitability. But a mistake to conclude: Post hoc, ergo propter hoc. Correlation is not necessarily causality. Indeed, the causality may flow from profitability to market share, not vice versa: wrong to believe that a charge for share would result in higher profits, especially when the share is “bought”. Impossible for all kids to be above average: share is a zero-sum game. A key determinant: size of demand relative to the minimum efficient scale (MES) of production. $/unit AC* AC (Q ) ...... .... ...... .... .. ...... ..... ....... ...... ........ ...... ............. .............................. D Q MES Output per period, Q A single firm selling to the whole market can set any price above AC* and make a profit. If another firm entered the market, it could not drive its costs down as low as the first firm unless it stole away some of its customers. The most efficient configuration in this industry is for one firm to satisfy all market demand: if two firms split the market at a given price, they would have higher unit costs (AC) than if a single firm supplied the entire market at that price. R.E. Marks ECL 2-27 Such a market is known as a natural monopoly. Often government-owned or regulated so that a single firm can utilise the economies of scale of lowest AC but not abuse its market power. R.E. Marks Three features emerge from Table 5.9: 1. Concentration can vary substantially by industry. 2. Concentration levels for a given industry appear comparable across nations. e.g. highly concentrated: cigarettes, glass bottles, refrigerators e.g. low concentrations: shoes, paints, fabric weaving A rule of thumb for the number of firms that can fit into a market: let AC* be the average cost of production at QMES ; if D* is the quantity of goods that will be bought when price P = AC*, then the number of firms the market can accommodate is D*/QMES . Suggests that the technology of production is a major determinant of market concentration: highest are capital-intensive, lowest generally not. If the market grows (D* increases), then more firms can fit into it. If the MES (QMES ) increases (because of larger plants), then fewer efficient firms will fit into it, cet. par. This implies: that industries with substantial economies of scale — industries with capitalintensive technologies — may come to be dominated by a few large firms. Besanko’s...
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