Market Concentration and Competition Dynamics

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Questions and Answers

What is a necessary condition for market concentration to indicate a misallocation of market power?

Significant barriers to entry

Strong competition among rivals

Technological homogeneity (correct)

High product differentiation

What business strategy did Amazon implement to gain a larger market share in the e-book market?

Raising the prices of e-books significantly

Collaborating with publishers for fixed pricing

Selling e-books at loss (correct)

Offering free e-books to customers

What pricing strategy did the publishers agree to with Apple?

Dynamic pricing model

Cost-plus pricing

Loss-leader pricing

Agency model (correct)

As of 2012, what was Amazon's share of the e-book market after the introduction of the agency model?

Sixty percent Signup and view all the answers

What is one of the implications of a high market concentration?

Potential collusion among firms Signup and view all the answers

Which publisher was NOT mentioned as part of the group that agreed to the agency model with Apple?

Random House Signup and view all the answers

What was the impact on consumer prices under the agency model introduced by Apple?

Prices increased Signup and view all the answers

What is a prerequisite for market power to be seen as advantageous for firms with larger shares?

Economies of scale Signup and view all the answers

What was the market concentration of the five largest banks in Greece at the end of 2016?

97% Signup and view all the answers

Which of the following countries had the lowest concentration of assets held by the five largest banks at the end of 2016?

Germany Signup and view all the answers

What trend occurred in numerous larger economies regarding banking concentration by 2016?

Increased concentration levels Signup and view all the answers

Which countries experienced a decrease in market concentration of the five largest banks during the period mentioned?

France and Ireland Signup and view all the answers

What was the total amount of assets held by domestic euro area banks at the end of 2016?

€24.2 trillion Signup and view all the answers

Which structural factor contributed to the lower concentration levels in Germany and Italy?

Strong cooperative banking sectors Signup and view all the answers

In which smaller euro area country is banking concentration generally higher?

Malta Signup and view all the answers

What was a notable trend observed in the banking systems of Belgium, Finland, and France from 2008 to 2016?

Decreased concentration in the banking sector Signup and view all the answers

How does the optimal minimum size (DOM) affect market concentration?

Higher DOM results in greater market concentration. Signup and view all the answers

What is a barrier to exit in a market?

Structural obstacles that hinder leaving an industry. Signup and view all the answers

What dictates the intensity of competition faced by companies?

The differentiation of their products. Signup and view all the answers

What happens when the supply growth rate exceeds the demand growth rate?

There will be a surplus leading to competitive pressure. Signup and view all the answers

How does a high operating leverage affect pricing strategies?

It necessitates price reductions potentially eliminating profit margins. Signup and view all the answers

What behavior is often displayed by leading companies in a competitive market?

Frequent price changes and new product launches. Signup and view all the answers

What role does the cycle of life of a product play in market dynamics?

It influences how supply adjusts to changes in demand. Signup and view all the answers

Which of the following is NOT a factor influencing barriers to exit?

Market price fluctuations. Signup and view all the answers

What is a primary objective of Amazon's pricing strategy?

To minimize tax liabilities Signup and view all the answers

How does Amazon's market approach reportedly affect traditional retailers?

It forces them out of business. Signup and view all the answers

What significant milestone did Amazon's stock achieve recently?

It surpassed $2000 per share for the first time. Signup and view all the answers

What investment amount has Amazon made in Italy?

€1.6 billion Signup and view all the answers

What is the general financial strategy Amazon appears to adopt?

To accept temporary losses for long-term gain Signup and view all the answers

According to the content, what convenience does Amazon provide that appeals to consumers?

Rapid delivery times Signup and view all the answers

Who is identified as the world's richest person due to Amazon's success?

Jeff Bezos Signup and view all the answers

What can be inferred about Amazon’s current market position?

It is experiencing unstoppable growth. Signup and view all the answers

What is one major factor that increases the threat of new entrants in a market?

Technological innovation Signup and view all the answers

How do existing companies typically react to the threat of new competitors entering their market?

By reducing prices Signup and view all the answers

Which of the following can weaken the threat posed by new entrants?

A decrease in overall market demand Signup and view all the answers

What role do market conditions play in the reactions of incumbent firms to new entrants?

They influence the competitive strategies used by incumbents. Signup and view all the answers

Which of the following best describes a condition that may attract new entrants into a market?

High profitability in the sector Signup and view all the answers

Study Notes

Concentration

Concentration is a disincentive for new entrants
Concentration does not give a unique indication on the intensity of competition
To determine if concentration indicates a power imbalance in the market, several pre-conditions need to be met:
- Homogeneous technology and minimal differentiation
- The presence of economies of scale
- The ability to influence supplier or distribution channels
Concentration might be related to collusion or competitive behavior to achieve market dominance

Example: Coca-Cola and Pepsi-Cola

The example illustrates how concentration can be influenced by the distribution of power and competitive strategies of companies
Apple's agency model, where publishers set prices and Apple takes a commission, changed the power balance in the e-book market

Banking Sector Concentration

In 2016, the five largest banks in Greece held nearly 97% of the assets, while in Germany and Luxembourg, the share was around 31% and 28% respectively
This differentiation is due to structural factors, such as the presence of strong savings banks and cooperative sectors in larger countries
Smaller euro area economies tend to have less fragmented and more concentrated banking systems

Concentration Process

The concentration process is influenced by the minimum optimal dimension (DOM)
A higher DOM leads to higher concentration
Example: the automotive sector
- If a factory's DOM is 2 million cars and the market is 10 million cars, there is space for 5 companies
- If the market is 4 million cars, there is space for 2 companies

Demand and Supply Relationship

The size of demand and supply influences competitive behavior
Competitions are more apparent when supply exceeds demand, or the supply growth rate surpasses demand growth
It’s important to consider the product life cycle

Exit Barriers

Exit barriers hinder the exit of companies from a market
They are structural obstacles that slow down or prevent the adjustment of supply to demand
Factors influencing exit barriers include:
- Idiosyncrasy of the product or service
- Interrelation with other sectors
- Institutional interventions
- Internal forces within the company
Exit barriers encourage competitive behavior

Cost Structure and Competitive Behavior

The competitive impact of an imbalance between supply and demand is influenced by the cost structure of a sector
When operating leverage (fixed costs constitute a significant portion of total costs) is high, companies are more likely to reduce prices, potentially eliminating profit margins
Operating leverage is calculated as the contribution margin divided by operating income
It represents the elasticity of operating income with respect to sales
Break-even point is a crucial concept in this analysis, and it represents the sales level at which total revenues equal total costs

Differentiation

Competitive intensity is inversely related to the degree of product differentiation
Homogenous products are primarily chosen based on price
Differentiated products enable companies to establish market dominance
It's important to consider the costs associated with differentiation

Intensity of Competition

The intensity of competition can be observed through the behavior of leading companies:
- Frequent price changes (unless coordinated)
- Repeated launch of new products
- Investment in communication
- Strengthening of the direct link with the market

The Threat of New Entrants

The threat of new entrants intensifies competitive pressure
It is influenced by entry barriers
Incumbent companies may engage in defensive strategies to prevent new entrants
The threat is less pronounced in growing markets

Sources of the Threat of New Entrants

Technological innovation (e.g., mp3, e-books, electric cars)
Changes in demand patterns (e.g., jewelry sector and the rise of “easy-to-wear” jewelry)
Modifications in the institutional framework (e.g., government incentives)
Evolution of economic and strategic conditions for companies operating in a sector
Profitability conditions within a sector (e.g., gold trading during periods of crisis)

Reactions and Effects of New Entrants

Incumbents can react to the threat of new entrants by:
- Reducing prices
- Acquiring struggling companies to prevent entry by other organizations
Reactions depend on the competitive conditions of a sector

Example: Amazon

Amazon’s dominance in e-commerce is marked by its low prices, strong infrastructure investments, and a focus on capturing market share
The company sacrifices profits for tax optimization and market dominance, impacting traditional players

Key Takeaways

Concentration is a measure of the market power distribution and can be influenced by factors like DOM and competitive strategies.
Exit barriers are structural obstacles that prevent companies from exiting a market, promoting competitive behavior.
Cost structure plays a crucial role in determining a sector's competitive dynamics, especially with high operating leverage.
Differentiation allows companies to create a distinct market position, influencing competitive intensity.
The threat of new entrants is a major force driving competition and prompting incumbent companies to adapt and defend their market position.
Examples like Amazon and the e-book market demonstrate how concentration, competitive strategies, and technological evolution shape industry dynamics.

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Description

Explore the intricacies of market concentration and its impact on competition through various examples, including Coca-Cola and Pepsi-Cola. Understand how factors like economies of scale and collusion can influence market power imbalances, particularly in sectors like banking.