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
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
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,
This implies: that industries with substantial
economies of scale — industries with capitalintensive technologies — may come to be
dominated by a few large ﬁrms.
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- Fall '13
- Microeconomics, Economics of production, R.E. Marks