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In many industries, such as banking, health insurance, internet search engines, pharmaceuticals, social media and telecommunications, there have been increases in market concentration - Edexcel - A-Level Economics A - Question 8 - 2021 - Paper 1
Question 8
In many industries, such as banking, health insurance, internet search engines, pharmaceuticals, social media and telecommunications, there have been increases in ma... show full transcript
Worked Solution & Example Answer:In many industries, such as banking, health insurance, internet search engines, pharmaceuticals, social media and telecommunications, there have been increases in market concentration - Edexcel - A-Level Economics A - Question 8 - 2021 - Paper 1
Step 1
High concentration ratio - Oligopoly market structure/Monopoly power/Monopsony power
Answer
In industries like telecommunications and banking, high market concentration leads to oligopolistic structures. This results in increased monopoly power, allowing firms to influence prices and output levels significantly. Businesses in these industries may face challenges in decision-making, such as whether to engage in price-setting strategies (like limit pricing) or how to respond to the pricing behavior of competitors.
Step 2
Decisions to erect/maintain high barriers to entry and exit
Answer
In sectors characterized by high concentration, established firms may create significant barriers to entry, such as economies of scale and differentiation. This may deter new entrants, affecting competition. Businesses must consider how these barriers impact strategic decisions, like investment in innovation versus cost-cutting measures.
Step 3
Interdependence of firms - use of game theory in decision making
Answer
Firms in a concentrated market often rely on game theory when making strategic decisions. For instance, in pharmaceuticals, companies may analyze competitor behavior before launching new drugs, affecting timelines and pricing strategies. The interdependent nature of decision-making can lead to collusive behavior, impacting market pricing.
Step 4
Role of competition in business decision making
Answer
In a concentrated market, diminished competition can lead to less incentive for firms to innovate or offer better prices. For instance, in health insurance, providers may not compete aggressively on price, leading to higher costs for consumers. Businesses must navigate these dynamics, balancing the uncertainties of maintaining customer loyalty with competitive pricing strategies.
Step 5
Regulation and its impact on business decisions
Answer
Regulatory bodies may impose fines or regulations to curb the monopolistic tendencies that arise from increased market concentration. Businesses must adapt their strategies to comply with regulations while seeking competitive advantages, often investing in legal and compliance resources.
Step 6
Wider benefits from new industry giants
Answer
While increased market concentration raises concerns, there are also benefits from leading firms investing in technology and innovation. For example, major tech companies can propel market growth through advancements and improved consumer service. Firms must evaluate how to leverage such innovations in their strategic planning.