Competition and barriers to entry

Apple have established an awesome reputation for quality and innovation. While they have only about 18% of the personal computer market they dominate the MP3 and phone market and the iPad sets the standard in tablets.

It is very difficult to challenge Apple in these markets and as a result of this barrier to entry (brand loyalty) Apple can charge very high prices.

Amazon have a similar position in book and ebook retailing online.

The problem is that monopoly power (which any firm with a large market share gains) works against the consumer. Competition should bring down prices and raise quality and customer satisfaction, but entering the market is often difficult and does not always work as expected.

Amazon is now taking on Apple's iPad with the Kindle Fire. A combined Kindle and tablet, and it is less than half the price of an iPad.

Is is good for consumers? Only a company like Amazon could really mount a serious challenge in such a market. They are providing an alternative at a lower price. But Amazon are also trying to lock you in to their product - Kindle ebooks. Remember Apple have iBooks, and the two systems don't talk to each other.

So we could look at this as welcome competition, or we could see is as two Oligopolists fighting for bigger market shares at the expense of any other competitors. Both Amazon and Apple would settle for being the Coke and Pepsi of consumer electronics.

My Kindle Fire is ordered and expected delivery is October 25th!

The Telegraph article is here

Barriers to entry and excess profits

A key difference between different market structures in the existence or not of barriers to entry. If a market has high barriers to entry then we expect to see only a few firms, each able to protect its market share and so charge higher prices. These higher prices mean lower sales but higher (excess) profits for the firms.

Where few, or no, barriers to entry exist new firms can enter a market and compete for a share of the profits earned by others. This leads to an increase in supply and a falling price. Consumers gain but excess profits are competed away.

The telecom companies used to be able to earn a lot of money from text messages (SMS), but this market is changing. There are no barriers to entry for free apps that allow free text or even calls. So the days when O2 or Orange can charge high fees for texts is going and so are their profits.

This, slightly odd, piece from The Age in Australia explains how this market is changing. Not news at all to you I'm sure, but an excellent example of how things you took for granted have an economic explanation.

The Age article is here

When is a single market not a single market?

Barriers to entry in a market allow firms some monopoly power and that gives them the chance to raise prices. produce at lower quality and earn excess profits. This is not good for the consumer and most countries attempt to prevent it through Competition Law. As the European Union is a 'single market' that means Competition Law is a European and not a national matter unless a firm operates only in one country.

The '1993' rules of the EU make it clear there can be no barriers to firms, workers or capital between member nations. All firms are free to operate in any other member state and all citizens of the EU can work where they like within the EU.

To illustrate this before 1993 a computer manufacturer had to produce 11 different models of the same computer to meet local regulations and a British lawyer could not appear in a court in Germany or Italy. The 1993 regulations said that such barriers were illegal.

However in many countries not all of these regulations were adopted. The Spanish banks continue to charge non-Spanish customers a higher interest rate, insurance companies are denied access to the Irish market and domestic broadcasters deny the right of foreign broadcasters to sell their services in the UK.

Yesterday the European Court ruled that the Premier League had no right to deny broadcasters other than Sky and ESPN to sell access to their broadcasts of football matches. To do so breached the 1993 EU regulations and EU competition law.

This is an example of the law removing a barrier to entry in the market. The result will be that more firms will enter the British market, competition will increase and everyone will have cheaper access to broadcasts. (Although the ruling is complicated and will take some time to work through.)

The actual case involves showing Premier League football in a Portsmouth pub. Of course Sky and the Premier League will protest, it will affect their profits, but the winner is the consumer. Just 38 years after Britain joined the European Union it is about to get one of the benefits it was promised!

 The BBC covers the story here