Discuss the effects of increased concentration in transport markets
Discuss the effects of increased concentration in transport markets.
Concentration ratio refers to the market share of the largest firms in an industry. For example, a 5 firm concentration ratio of 65% means that the 5 largest firms have more 65% of market sales.
If the concentration ratio increased, then 1 or 2 firms may start to dominate the market and the firms will be able to exercise Monopoly power. (in UK legal definition of a monopoly is a firm with more than 25%) This is likely to cause many different types of inefficiencies
In the above diagram the firm maximises profit where MR=MC at output Qm. This output is allocative inefficient because P > MC. Also, if the firm faces little competition it will have less incentive to develop new products and respond to the needs of the consumers. The firm is also productively inefficient, because it does not produce on the lowest point of the AC curve. Monopolies are also often X inefficient because with less competition they have less incentive to cut costs, e.g. they may employ surplus labour.
Other effects of this increase in Monopoly power include; an increase in the firm’s supernormal profits at the expense of the consumer. This could be used to finance predatory pricing and force rivals out of business, this will reduce competition even further. Also, if firms get too big they may suffer from diseconomies of scale which leads to higher average costs.
However, an increase in the concentration ratio is not necessarily a bad thing. Firstly, if firms increase in size they may be able to benefit from economies of scale, causing lower average costs. This is likely to occur in industries with high fixed costs and scope for specialization.
Another effect from increased Monopoly power is that firms will be able to use profits for investment in research and development, therefore, in the long term firms are likely to become more efficient because they could develop better technology.
The theory of contestable markets,
Concentration ratio refers to the market share of the largest firms in an industry. For example, a 5 firm concentration ratio of 65% means that the 5 largest firms have more 65% of market sales.
If the concentration ratio increased, then 1 or 2 firms may start to dominate the market and the firms will be able to exercise Monopoly power. (in UK legal definition of a monopoly is a firm with more than 25%) This is likely to cause many different types of inefficiencies
In the above diagram the firm maximises profit where MR=MC at output Qm. This output is allocative inefficient because P > MC. Also, if the firm faces little competition it will have less incentive to develop new products and respond to the needs of the consumers. The firm is also productively inefficient, because it does not produce on the lowest point of the AC curve. Monopolies are also often X inefficient because with less competition they have less incentive to cut costs, e.g. they may employ surplus labour.
Other effects of this increase in Monopoly power include; an increase in the firm’s supernormal profits at the expense of the consumer. This could be used to finance predatory pricing and force rivals out of business, this will reduce competition even further. Also, if firms get too big they may suffer from diseconomies of scale which leads to higher average costs.
However, an increase in the concentration ratio is not necessarily a bad thing. Firstly, if firms increase in size they may be able to benefit from economies of scale, causing lower average costs. This is likely to occur in industries with high fixed costs and scope for specialization.
Another effect from increased Monopoly power is that firms will be able to use profits for investment in research and development, therefore, in the long term firms are likely to become more efficient because they could develop better technology.
The theory of contestable markets,