Hi guys, can you please help and advise on below question in Schweser reading 50, question 5
greater pricing power is most likely to result from: unused capacity/ market concentration / volatility in market share?
answer says market concentration, however i believe this is incorrect if there are few competitors in the market with equal market share, and this would not result in greater pricing power.
please clarify, thanks for your help.
I think that if there are few players in a certain industry, then the pricing power increases. Consider, for example, Apple. Apple diffrentiates itself from the rest because of its products. Even if they price their products higher, people are willing to buy them. This might be because of customer loyalty, brand Apple, or simply because their products really are different from what others offer. So, Apple is concentrated in the products market (Mobile phones); hence, it has a pricing power to a certain extent. I’d request poeple to correct me if I am wrong.
As market concentration increases, there are fewer competitors to undercut your prices. There’s also the fact that collusion is more likely as concentration increases, but that’s illegal so for textbook answers we can basically ignore it.
For example, lets say three companies - X, Y, Z, each have one store in your city. They’ll each have higher pricing power as customers now have to factor in the cost of driving across the city to save a few dollars and things like that. If there were lots of companies and stores, suddenly the customer only has to walk around the corner. You’ve lost that pricing power.
I mean, it’s a super basic explanation but the principle is the same. I can’t remember if monopoly/oligopoly is covered on L1 but that goes a lot more in depth on this stuff. Remember, perfect competition is when there are so many competitors that you MUST price at the marginal cost, otherwise a million ma’ and pop shops will undercut you and steal your thunder.
Thanks both of you, was helpful
Yes as per correctly explained by both blackjack21 and woodywoodford.More market concentration means greater pricing power but it is limited to a certain level as per the conditions.