A2 Micro: Contestable Markets
William Baumol defined contestable markets as existing where “An entrant has access to all production techniques available to the incumbents, is not prohibited from wooing the incumbent’s customers, and entry decisions can be reversed without cost.”
For a contestable market to exist there must be low barriers to entry and exit so that new suppliers can come into a market to provide fresh competition. For a perfectly contestable market, entry into and exit out must be costless
HMV diversifies into cinemas
Here is a great example of business diversification and growth through joint venture. HMV is entering into a joint venture with cinema chain Curzon Artificial Eye to open a cinema called hmvcurzon above its Wimbledon store.
read more...»Contestable Markets – The Market for Smart-Phones
In AS microeconomics the examiner may set you a question about the effects of a new supplier entering a market. There are also frequent questions on the costs and benefits of competitive markets compared to industries dominated by a monopolist or a handful of new firms. In A2 economics, contestable markets form an important part of your study of the theory of market structures, economic welfare and efficiency.
Tim Weber, Business editor of the BBC News website has written a superb article on the competitive pressures building inside the mobile phone market – “as the market for high-end mobiles gets ever more crowded, which should you pick?” – this is a classic tale of a market space become evermore congested as the likes of Apple, Microsoft, Research in Motion and Symbian (developers of the software that run most of Nokia’s smart-phones) compete with each other for a share of the lucrative corporate and personal sector market.
It is a market where performance, functionality, speed and reliability of access, look and feel of the hardware and the length of battery life are all important non-price factors influencing consumer preferences. Price is significant – and the article makes reference to the need to attract heat-seekers or ‘early adopters’ – consumers who are willing to pay a premium price for being among the first to be seen using a new piece of kit.
Despite the obvious barriers to entry for new participants, the smart-phone market is increasingly contestable even though it is dominated by a handful of major players. The increasing use of open-source software has helped to make the battle for market dominance a more intense affair.
Far from being geeky, this is an article that gives you a super case study in how the existing operators are competing with each other. How will the market for smart-phones be affected by the recession?
The article is available here:
Regular articles on the economics of contestable markets appear on my blog here:
SPEW
A hat tip to a fellow presenter on our revision workshops in London whose acronym to remember some of the effects of monopoly power in markets struck a chord with me
SPEW
Service - does the lack of competition affect the quality of service to consumers?
Prices - how high are prices compared to competitive / contestable market
Efficiency - productive, allocative and dynamic
Welfare - what are the overall welfare outcomes? Is there a net loss of welfare in markets dominated by businesses with monopoly power?
Are there anymore useful revision acronyms out there that you use? Please share them via the blog!
Betting on Perfect Competition
One of the annual rituals for A2 Economics teachers is the lesson when we cover the assumptions that lie behind the model of perfect competition and ask the perennial question - are there any real-world industries that come close to this particular market structure?
In the past I have used local fruit markets, clusters of nightclubs or bars in busy tourist venues and auctions for newly caught fish as examples of markets which satisfy some of the criteria needed for perfect competition to exist. It allows one to discuss the importance of low entry and exit costs into and out of the market; the significance of many sellers supplying essentially homogeneous products and the role that price transparency plays in shaping the incentives of buyers and sellers.
A colleague suggested to me a few weeks ago that his local racecourse provided a suitable example to use. He is often to be found at summer and early autumn meetings after school in the evening, enjoying the occasional bet, a stunning location but more importantly the chance to watch competitive markets in action - namely on-course betting!
read more...»Can the Royal Mail continue to provide a universal postal service?
The Royal Mail produced some pretty decent results last week. Their operating profit for the first six months of their financial year doubled to £177million - a welcome return to profitability for a mail network that has come under huge pressure from increasing competition within the recently deregulated market.
read more...»Exiting the Market
We have been discussing in our microeconomics classes, examples of businesses that have exited a particular market - reallocating their resources into what they hope and expect will be more profitable avenues. A business-collapse or implosion is an obvious example of when there is a net loss of firms from a marketplace, for example the collapse of several low-cost airlines this year and the closure of many businesses linked to the ailing housing market.
read more...»Supermarkets battle for market share in retail clothing
Marks and Spencer and Primark take the top two places in the retail clothing market - and behind them the major supermrkets have been engaged in a fierce battle for the low-price, high volume segment of the market beloved of households who replace tee-shirts and underwear rather than wash and iron them. So who is winning? Most people would figure Tesco was in the lead, the latest figures suggest something different.
Aldi’s explosive growth - can it break through?
“Don’t change your lifestyle, change your supermarket”
Food market share
Tesco: 31.6%
Asda: 17%
Sainsbury’s: 15.8%
Morrisons: 11.1%
Somerfield: 3.7%
Waitrose: 3.8%
Aldi: 3.0%
Lidl: 2.4%
Iceland: 1.7%
Netto: 0.7%
% sales of total grocers in 12 weeks to 12 August 2008
That is the Aldi strap-line as it seeks to change the shopping habits of price conscious consumers across the UK. The dramatic sales growth from the deep-discount food retailers is one of the big stories of 2008 and German-owned Aldi is planning to add one new store a week to its portfolio in a significant bid at organic growth and rising market share. The Telegrpah provides this analysis of the rise of the Aldi chain and how their retail model is radically different from the 24-hour, sell it all mentally of the likes of Tesco. Is the apparent shift from status to value a product of the times in which we live? or evidence of a longer-lasting change in consumer preferences. I have never set foot in an Aldi or a Lidl store, it might not be long before I do!
Web browser war hots up with release of Chrome
How many of you downloaded and installed Google’s new web browser Chrome? For the first time I now have four web browsers on my desktop and to be honest it makes a neat change to have the option when loading up for some web searching. The five way battle for web browsers provides a useful mini case study in the essence of contestable markets.
read more...»Cycling on a roll - competitive advantage in action
Much has been written about the factors behind the success of the GB cycling team in the Beijing Olympics. Some commentators are drawing parallels with the World Cup winning team in the Rugby World Cup of 2003 and for students of economics, there are some useful insights into what determines competitive advantage in markets.
read more...»Apple’s dilemma resolved by falling pound
Earlier this year Apple was accused of engaging in some blatant price discrimination by selling download tracks at a higher price in mainland Europe compared to the UK. They responded by saying that they wanted to bring in a “standardised price” within months. Well now the falling pound against the Euro seems to have done the job for them - according to this BBC report - “exchange rate changes since January mean 0.99 euros now equals 79p, meaning no price cut is necessary, Apple said”
Still no explanation for why download prices are cheaper in the USA? I haven’t downloaded a song from iTunes for months - there is now much more competitoon - but I am happy enough downloading the free podcasts to keep me happy!
Somerfield walks down the aisle with the Co-Op
Consolidation continues apace in the UK food retail sector. Yesterday the Co-op (a mutual owned by its 2.5 million members) acquired Somerfield (owned by a private equity fund) for £1.57bn in an example of horizontal integration designed explicitly to give the Co-op the opportunity to achieve greater economies of scale across its business. The combined market share of the newly merged business will be around 8% - less than half the share enjoyed by each of the next biggest retailers Sainsburys and Walmart (Asda).
read more...»Borders v Amazon
Borders has broken away from Amazon after seven years to launch its own standalone website - the UK version is still in beta testing mode and you can sign up to be a tester ahead of the full roll-out.
According to Publishers Weekly
“Borders.com will have a total of 2 million books/DVDs/music in its inventory. In addition, in an agreement with Alibris, Borders will now offer about 60 million used books for sale. The site also features a link to its cobranded e-bookstore with Sony and has the ability to download digital audio either in DRM or DRM-free formats.”
What chance do you think that Borders has of breaking the stranglehold of Amazon in UK online book buying? Are the barriers to entry likely to prove insurmountable?
Has competition in postal services delivered?
Two years on from the liberalisation of the postal services industry, has this supply-side policy to make the market more contestable made any noticeable difference to the quality of service, prices and investment in delivery? A new report casts doubt on the changes to the industry since the market opened up to competition at the start of 2006 to businesses such as UK Mail. Robert Peston reports for the BBC in this video clip. His feature asks whether the universal service provision is a millstone round the neck of the Royal Mail which remains in deep financial trouble.
read more...»Farewell Microhoo, we never knew you…
After three months of tight negotiations, it has finally been announced that Microsoft will walk away from its bid for Yahoo because the two cannot agree on an acceptable sale price. The whole world has been watching this proposed merger intently, as it may have been the deal to change the plate tectonics of the technology age.
Tesco adds to contestability in digital downloads
News today of yet more competition in the increasingly contestable market for music and film downloads. Tesco Digital is launching a new platform-neutral service which eventually will offer 3.3m music tracks compatible with iPods and other MP3 players. At the moment, the downloable tracks are only available in windows media player format. The move heralds yet more pressure for high street retailers such as HMV who are also building an online presence. Do you think that Tesco’s move will be a success?
Will they, won’t they?
The Delta-Northwest farce finally appears to be drawing to a close. The two have been discussing a merger for over two months now, being plagued with seniority list integration issues. Today was the closest the deal has ever reached, with a possible announcement about its completion as early as tomorrow. If given the go-ahead, this would create the world’s largest airline. This has both United and Continental quaking in their boots, with talks of a possible merger between the two. Both Delta and Northwest shares rose over the day.
read more...»Competition or informal price fixing?
Sainsbury’s is completely awash at the moment with price check stickers on hundreds of branded grocery items from rice to sauces, from pizzas to soups. On the surface a sign that the supermarkets are competing with each other to keep down the prices of basic items at a time when household budgets are being stretched (the big marketing push at Sainsburys at the moment is the idea that you can feed a family for a fiver).
read more...»Revision: Console wars
I will be using this table with my A2 microeconomics group as a revision exercise - partly to discuss competition in a contestable market; the factors that determine pricing power and other micro concepts such as elasticities of demand, economies of scale and hardware product cycles. How else could the data be used? Suggestions please! I have made the original word document available for download below.
Console prices
Console_Prices.doc
Contestable Markets - Online Music
When was the last time you went into a store or ordered a CD online? The BBC web site reports that iTunes has overtaken Walmart as the biggest retailer of music in the United States. Over 50 million people have used iTunes since its inception but the market for downloadable music is becoming more and more contestable as the major players line up for a share of the supernormal profits that are available. MySpace has entered into a joint venture with Universal, Sony BMG and Warner and will now compete with rivals such as Last FM (a free streaming service) eMusic and Napster. According to the new data (which covers the month of January) 48 percent of US teenagers didn’t buy a single CD in 2007, compared to 38 percent in 2006. Paid music downloads in the USA accounted for almost 30 percent of all music sold in January.
Music sales in the USA (for Jan 2008)
iTunes Store - 19 percent
Wal-Mart - 15 percent
Best Buy - 13 percent
Amazon - 6 percent
How important do you think ‘first mover advantage’ is in this market? As a dedicated iTunes user I haven’t even looked at competitor services for many months now.
A new era for air travel
Today marks a momentous triumph for competition over protectionism. Anti-competitive practices dating back to the 1944 Chicago Convention will finally be scrapped for the new Open Skies agreement between the European Union and the United States. Currently, only British Airways, Virgin Atlantic, United and American Airlines are legally allowed to offer direct flights from Heathrow Airport to the US. But after the deregulations of transatlantic air travel, the market will at last be open to competition from challengers.
read more...»
