Market Dominance

Definition – Market Dominance

Firms that have a high market share.

Market share can be measured by the share of sales or customers in that market.

Firms who have the ability to set prices.

Forms of market dominance Monopoly- Defined as a single supplier or a firm

that has more than 25 % of the market share.

Microsoft has patents and copyrights that give them exclusive rights to sell a product and to protect their intellectual property. Example Microsoft Windows name and software. (Refer to case 6)

Oligopoly- A market where few firms dominate.

UK supermarket dominated by mainly 4 firms ( refer to case 3).

Reasons for market dominance Barriers to entry- which means the factors

that prevent other firms from entering the market.

- Economies of scale- cost advantages over potential new entrants because of size.

- Dropping prices too low - Setting price below the average cost of

new entrants.- Ownership of a scarce resource

Reasons for market dominance- High set-up costs- Heavy expenditure on advertising.- Loyalty schemes and brand loyalty. ( Tesco Club

cards).- High R&D costs- Superior knowledge- Exclusive patents, copyrights and licenses.- Quality and promotions

Impact of market dominance on consumers ( Good and Bad) Increased price Reduced variety Quality may be affected New products Promotions offers

Impact of market dominance on producers ( Good/Bad) Exploitation of farmers/suppliers Profits Power Innovation

Arguments in favour of market dominance Consumers may benefit from lower

prices/costs. Product innovation/investment in R& D National economy may benefit as a result of

increased exports. Avoids duplication of infrastructure. Economies of scale

Arguments against market dominance

Public interest against higher prices/restricted output/choice

Excessive profits made by businesses. Less efficiency Less employment as higher prices lead to

lower output which means less workers required.

Reduced competition Barriers to entry

Forms of control/regulation Price controls- Setting up prices/fixing prices Prohibiting mergers- UK Competition

commission prohibits firms to merge together if they create a combined market share of 25 % market share or more.

Breaking up of dominant firms into smaller firms Regulation- Regulators such as OFCOM or

OFGEM regulate/control markets in terms of laws.

Taxation of excessive profits Fines Competition laws Nationalisation

Competition Act 1998 (law)

Deals with abuse of a dominant firm’s position.

Fixing prices

Regulators in the UK Office of Fair Trading (OFT)- Independent body that makes sure markets work

effectively.- It has separate divisions for public utilities such

as- OFGEM- Energy ( Electricity /gas) regulator OFCOM- Telecoms regulator OFWAT- Water and sewerage market regulator ORR- Rail industry regulator

Regulators in the UK Office of Fair Trading (OFT) main

objectives are:- Identify and put right practices which are

against consumer’s interests.- To regulate anti-competitive practices.- To investigate the abuse of market power.- To promote competition

Competition commission

An independent public body which conduct enquiries about mergers or dominant firms.

They will recommend if firms can merge or not and set restrictions if they believe that competition will be reduced.

Arguments for control/regulation

Firms might invest some of their profits back into the business to improve their product/service.

Maintain affordable prices for consumers and avoid exploitation to protect consumers.

Safeguarding producers.

Arguments against regulation/control

Can lead to loss of jobs. Costs to consumers, firms and

government. Discourage enterprise and innovation.