Leisure industries
The package holiday market
| The number and size of the firms dominating the industry. | Market dominated by four very large firms with a four-firm concentration ratio of 76%. |
|---|---|
| Product differentiation. | Purchasing smaller firms offering a unique product to a niche market. All holidays differ, they may be half board/full board to different destinations and different qualities of holidays can be purchased at different prices. |
| Control of the firm over its price. | Improving control as firms recover from previous price wars aiming to differentiate their products and offer higher quality holidays. |
| How easy/difficult it is for new firms to join or leave the industry. | High as large operators can gain significant benefits from economies of scale. |
| How profitable the industry is. | Generally very profitable but following price wars in the late 80s and 2000-2001 firms have suffered lower profits. Product differentiation allows supernormal profits to continue into the long run in the package holiday market. |
| The possibility of mergers/acquisitions to gain significant economies of scale. | Very attractive. In 1999 the merger of Airtours and First Choice was blocked. |
| How efficient the firm is. | Productive efficiency is good as firms battled in recent price wars aiming to maximise efficiency and lower prices, but allocative efficiency poor as large supernormal profits are made by most firms. |
| To what extent there is collusion between firms in the industry. | Unlikely as holidays are not homogeneous and other firms would find it very hard to monitor if another firm was abiding by the collusion. |
The air travel market
| The number and size of the firms dominating the industry. | British airways has a 48% market share (measured by mile-tonnage) and there is a three-firm concentration ratio of 65.7%. |
|---|---|
| Product differentiation. | Aiming at different customers and offering different degrees of flexibility. Many customers are loyal to a brand they can trust. |
| Control of the firm over its price. | Less as low cost airlines have entered the industry, but due to product differentiation the firm still has some power to control its price. |
| How easy/difficult it is for new firms to join or leave the industry. | Barriers to entry are very high such as purchasing aircraft and time at popular airports. Lowered by use of leased aircraft and liberalisation of European skies. Barriers to exit are high due to very high sunk costs such as aircraft. |
| How profitable the industry is. | Previously high yet decreasing as firms are forced to cut costs as new firms enter the market, but as firms establish their own differentiated product supernormal profits will increase. |
| The possibility of mergers/acquisitions to gain significant economies of scale. | Very high, many firms have participated in horizontal integration to gain benefits from economies of scale. |
| How efficient the firm is. | Productive efficiency has been improved with the recent entry of low cost airlines in to the market. Allocative efficiency is still poor as large supernormal profits are made by firms. |
| To what extent there is collusion between firms in the industry. | Price wars between low cost airlines and difficulty of one firm knowing if another firm sticks to the collusive agreement makes collusion unlikely. |
The spectator sports market
| The number and size of the firms dominating the industry. | A large number of firms, with some large firms such as Arsenal and Manchester United dominating the football market. |
|---|---|
| Product differentiation. | Fans view the service offered by each team as unique, even within the same sport there is high brand loyalty and fans view the service offered by other teams as a poor substitute to that of their chosen team. |
| Control of the firm over its price. | Very strong as there is very strong brand loyalty, however many clubs set a maximum price lower than the market equilibrium, probably to keep tickets cheap for genuine fans as football teams have objectives other than profit maximisation. |
| How easy/difficult it is for new firms to join or leave the industry. | Barriers to entry: To compete with large teams entry to leagues and ability to obtain highly talented players. Barriers to exit: Sunk costs in the form of players contract and large stadium necessary to compete with large teams. |
| How profitable the industry is. | Short run: Very due to the unique product offered by each club. Long run: Very, again due to very strong brand loyalty |
| The possibility of mergers/acquisitions to gain significant economies of scale. | Not likely as firms offer a unique product though vertical integration is attractive to large clubs. In 1999 Manchester United's attempt at vertical integration was blocked. |
| How efficient the firm is. | Productive efficiency: No motivation to become efficient due to the monopolistic nature of the club to the market of its fans. Allocative efficiency: Poor as large supernormal profits are often made. |
| To what extent there is collusion between firms in the industry. | Unlikely as each firm operates a monopolist supplier to their own fans. |
The television broadcasting market
| The number and size of the firms dominating the industry. | Four large firms and a large number of smaller firms. |
|---|---|
| Product differentiation. | Small firms offer a unique service to a niche market whilst large firms compete on quality content to gain audiences. |
| Control of the firm over its price. | Prices controlled by suppliers, most often for a fixed rate for a given time period like the TV licence or ntl: subscription. Some services also available on a pay-per-view service. |
| How easy/difficult it is for new firms to join or leave the industry. | Barriers to entry: Given the new capabilities of digital TV barriers to entry have been greatly reduced. Barriers to exit: Likely to be low. |
| How profitable the industry is. | Short run: Traditionally very profitable. Long run: New entrants may reduce profits if they can produce programs that are good substitutes. |
| The possibility of mergers/acquisitions to gain significant economies of scale. | |
| How efficient the firm is. | Productive efficiency: Larger firms are more productively efficient as there are negligible variable costs in this market. Allocative efficiency: As profits are made the market is not allocatively efficient. |
| To what extent there is collusion between firms in the industry. | Unlikely to be collusion due to the nature of the BBC's funding it will act as a source of competition. |
These notes are from a homework given on 20/10/2004.
