# 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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## This note was uploaded on 02/04/2014 for the course TIDB 1010-18 taught by Professor Kellygrany during the Fall '13 term at Tulane.

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