Chapter 6: Market Size and Scale Effects
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Market Size Matters
• European leaders always viewed integration as
compensating small size of European nations
– Implicit assumption: market size good for economic
performance
• Facts: integration associated with mergers,
acquisitions, etc.
– In Europe and more generally, ‘globalisation’
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Economic Logic Verbally
•
•
•
•
•
liberalisation 
de-fragmentation 
pro-competitive effect 
industrial restructuring (M&A, etc.)
RESULT: fewer, bigger, more efficient firms
facing more effective competition from each
other
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• L’analisi avviene attraverso la costruzione
di due curve
• La curva Comp mostra la relazione tra
numero di imprese sul mercato e mark up
(differenza fra prezzo e costo marginale)
• La curva BE mostra la relazione tra numero
di imprese in Break Even (prezzo uguale
costo medio) e mark up
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BE-COMP diagram
Mark-up (m)
•Comp:
•n=1 ovvero monopolio m
massimo
•Al crescere del numero di
imprese il mark up si riduce
(fino a zero in concorreza
BE (break-even) curve p=costo marginale
•BE: relazione crescente tra
mark up e numero di
imprese che riescono a stare
sul mercato senza perdite .
COMP
curve
m
mono
mduo
m’
n=1 n=2
n’
Number
of©firms
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Costruzione della curva BE
• Se non ci fosse nessuna relazione tra dimensione di
impresa e costi medi di produzione non ci sarebbe nessuna
relazione tra mark up e numero di imprese in pareggio sul
mercato
• Se vi sono costi fissi, costi totali TC=A+cQ Costi medi
AC=(A/Q)+c la curva del costo medio è sempre
decrescente al crescere di Q e tende asintoticamente al
costo marginale c
• Anche senza costi fissi la curva del costo medio è sempre
decrescente in Q se i costi totali al crescere della quantità
prodotta crescono in modo meno che proporzionale (costi
marginali decrescenti, ovvero “rendimenti di scala”
crescenti)
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• Nel grafico successivo vedete a sinistra una curva del costo
medio decrescente. L’ipotesi è che sul mercato ci siano n
imprese uguali con curva AC. Al prezzo p0 la domanda
totale di mercato (curva di domanda nel secondo grafico) è
C0
• Ogni impresa per essere in pareggio al prezzo p0 (=AC0)
deve produrre la quantità x0.
• Quindi il numero massimo di imprese in pareggio al prezzo
p ovvero al mark up m0 è n0=C0/x0
• Nel terzo grafico vedete la relazione tra il numero di
imprese in pareggio e il mark up (l’asse verticale
rappresenta solo il mark up perché l’origine è in
corrispondenza di MC, costi marginali )
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Details of BE curve
euros
price
Mark-up
(i.e., p-MC)
Home market
po=mo+MC
BE
Demand curve
AC>po
A
ACo=po
mo
po
AC<po
B
A
B
AC
MC
Sales
per firm
x’= Co/n’
x”= Co/n”
xo= Co/no
n” no
Co
n’
Number
of firms
Total
sales
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Equilibrium in BE-COMP diagram
euros
Price
Mark-up
Home market
Demand curve
E’
p’
p’
BE
E’
m'
E’
AC
COMP
MC
x’
Sales
per firm
n’
C’
Number
of firms
Total
sales
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Economic Logic
• Integration: no-trade-to-free-trade: BE curve shifts out (to point 1)
• Integrazione: da no commercio a commercio libero. La curva si
sposta e passa nel punto 1 dove il mark up iniziale m adesso è
compatibile con il doppio di imprese in pareggio 2n’
• Defragmentation
– PRE typical firm has 100% sales at home, 0% abroad; POST: 50-50
– Can’t see in diagram
L’impresa tipica che prima vendeva il 100% del prodotto sul mercato interno
ora vende 50-50 sui due mercati (ma questo non si vede nel diagramma)
• Pro-competitive effect:
– Equilibrium moves from E’ to A: Firms losing money (below BE)
– Pro-competitive effect = markup falls
– short-run price impact p’ to pA
• Effetto pro competitivo: il mark scende, il nuovo equilibrio è in A
dove però l’impresa tipica è in perdita (al di sotto della curva BE)
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•
•
•
Industrial Restructuring
– A to E”
– number of firms, 2n’ to n”.
– firms enlarge market shares and output,
– More efficient firms, AC falls from p’ to p”,
– mark-up rises,
– profitability is restored
Result:
– bigger, fewer, more efficient firms facing more effective competition
Welfare: gain is “C”
• Ristrutturazione industriale (III grafico a
destra)
–
–
–
–
da A a E”
Numero di imprese da 2n’ to n”.
Queste imprese hanno una quota di mercato e output più elevati e
Le imprese sono più efficienti, il costo medio scende da AC da p’
a p”,
– Il mark-up aumenta
– Le imprese tornano in break even
– RISULTATO: meno imprese, più grandi,più efficienti, e più
concorrenza. Prezzi più bassi
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No-trade-to-free-trade integration
euros
price
Mark-up
Home market only
Demand curve
BE
BE
p’
p”
E’
E’
p’
E”
p”
C
m'
E’
A
1
E”
E”
pA
mA
A
AC
COMP
MC
x’ x”
Sales
per firm
FT
n’
C’ C”
n”
2n’
Number
of firms
Total
sales
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State aid (subsidies)
•
2 immediate questions
– “As the number of firms falls, isn’t there a tendency for
the remaining firms to collude in order to keep prices
high?”
– “Since industrial restructuring can be politically painful,
isn’t there a danger that governments will try to keep
money-losing firms in business via subsidies and other
policies?”
•
•
The answer to both questions is “Yes”.
Turn first to the economics of subsidies and EU’s
policy
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Economics: restructuring prevention
•
•
Consider subsidies that prevent
restructuring
Specifically, each governments
make annual payments to all
firms exactly equal to their
losses
–
–
•
i.e. all 2n’ firms in Figure 6-9
analysis break even, but not new
firms
Economy stays at point A
This changes who pays for the
inefficiently small firms from
consumers to taxpayers.
Mark-up
BE
BE
m'
E’
FT
1
E”
mA
A
COMP
n’
n”
2n’
Number
of firms
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Only some subsidise: unfair competition
•
•
•
•
•
If Foreign pays ‘break even’ subsidies to its firms
All restructuring forced on Home
2n’ moves to n”, but all the exit is by Home firms
Unfair
Undermines political support for liberalisation
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EU policies on ‘State Aids’
•
•
1957 Treaty of Rome bans state aid that provides firms
with an unfair advantage and thus distorts competition.
EU founders considered this so important that they
empowered the Commission with enforcement.
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Anti-competitive behaviour
•
Collusion is a real concern in Europe
–
•
dangers of collusion rise as the number of firms falls
Collusion in the BE-COMP diagram
– COMP curve is for ‘normal’, non-collusive competition
– Firms do not coordinate prices or sales
•
Other extreme is ‘perfect collusion’
–
–
–
Firms coordinate prices and sales perfectly
Max profit from market is monopoly price & sales
Perfect collusion is where firms charge monopoly price and
split the sales among themselves
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EU Competition Policy
•
•
To prevent anti-competitive behavior, EU policy focuses
on two main axes:
Antitrust and cartels. The Commission tries:
–
to eliminate behaviours that restrict competition (e.g. pricefixing arrangements and cartels)
– to eliminate abusive behaviour by firms that have a dominant
position
•
Merger control. The Commission seeks:
– to block mergers that would create firms that would dominate
the market.
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