Join the Premium Student Club @Zero Cost!
Get Assignment Done by MAS Certified Experts
Flat 50% Off on Assignment Bookings
Short-Run Equilibrium in Perfect Competition
Identical Cost Condition
Market Power Paradigm
Impact of Exchange Rate
The importance of sound market analysis in the business sector cannot be overemphasized and is crucial for business success regardless of the size and nature of business operations. Furthermore, one of the major elements of such an analysis is the economy overview which helps to understand the key elements of the market and facilitates business decision making (Hill 2016). To capitalize on such an insight into the market, the Irish Booksellers Association commissioned a report by economist Jim Power on the "The Economic Contribution of the Irish Bookselling Sector”. The report includes the economic overview of the Irish bookselling market, including the social and financial contribution of the bookselling sector to the Irish society and the overall economy.
In addition to this, the report mentioned the trends in the publishing sector, and the sector’s gross value added (GVA) contributions to the Irish GDP, along with the data on direct employment and wages in the sector (Bogue, Collins and Troy 2017). The report also mentioned the direct tax contribution of the sector and concluded with the potential challenges which might be faced by the sector due to Brexit. This paper analyzes the said report and presents a critique of contemporary economic issues in Irish Bookselling market with the help of economic framework and decision-making. Moreover, the paper also assesses and evaluates macroeconomic policy decisions such as labour market policies and competitiveness policies on the business environment.
The first thing while analysing a market is to examine the market share of key competitors to determine the kind of market it is and the way it influences the players in it. This is important as different market structure have different characteristics which guide the behaviour of firms operating in the same (Krivka 2016). This is done by calculating the concentration ration of the market which indicates the size of key players relative to the industry and a low concentration ratio indicates high competition, while a high ratio denotes low completion.
Market concentration is calculated with the help of the Herfindahl-Herschman Index (HHI), which is a commonly accepted measure of market concentration. HHI calculated by squaring the market share of individual firms and aggregating the resulting numbers. Furthermore, the lower the index value is, the competitive the market becomes (Azar, Marinescu and Steinbaum 2020). HHI of Irish Bookselling market is mentioned below.
Market share of key firms:
Table 1: Market share of top 4 Irish publishers
Given that HHI value is 781.12, it can be inferred that the industry is of low concentration which suggests that this is a highly competitive or perfectly
competitive market (Krivka 2016). This means that there is perfect knowledge in the market regarding the products and is freely available to all participants. No single firm can influence the market conditions or market price and individual firms are considered as price takers.
The Irish bookselling industry is in perfect competition. Perfectly competitive market structure is a hypothetical market in which competition is at its highest, that makes this structure most beneficial for society and consumers (Vartale 2020). The below-mentioned diagram illustrates the market structure.
As the diagram suggests, firms in perfect competition are price taker due to pressure of competing firms which forces them to accept equilibrium prices. In this market, consumers and producers have perfect knowledge and it is assumed that they take rational decision based on the same. Moreover, there are no barriers for entry and firms produce identical, homogenous, units of output. Due to homogenous products, and high competitiveness of the market, producers act as price takers and are not able to influence the market significantly on their own. However, firms do enjoy supernormal profits in the short run, but they tend to disappear in the long run.
Still, there are some firms with comparatively high market share, due to their high quality of product and better business operations (Manna 2017). For instance, Gill Group the leading domestic publisher has published award-winning books and has a diversified portfolio which includes education publishing for college students and secondary schools (Farmar and Kostick 2018). This means that even though firms cannot compete in terms of prices, they can use marketing and better service to attract customers. However, since the information is easily available in this market, competitors can quickly change their operations and can remove the competitive advantage of others.
In the case of Gill Group, other publishers can review why Gill's books are selling and what are the tastes and preferences of the market to improve their position. Additionally, the marginal revenue and average revenue for firms in this market equal to the price of the product to the customer. Therefore, the perfect equilibrium which gets disrupted due to improvement in the firm's operations gets restored. This, in turn, makes a perfectly competitive market shift towards zero in terms of profits or losses in the long run (Sharma 2020).
Short-run refers to a period in which the firms can change their level of output only by decreasing or increasing the amounts of variable factors such as raw materials and labours. In this scenario, fixed factors like machinery and capital remain unchanged (Walker 2020). In this period, the perfectly competitive market can have equilibrium in two stages. First, in which firms are operating under identical costs conditions, and others, in which they are operating differential cost conditions (Sharma 2020).
Under identical cost conditions, the marginal cost and average cost curves are equal in shape and level. This implies that every firm has the same level of efficiency and factors of production in all of the firms are available to them at the same prices and are homogenous (Shaikh 2016). Therefore, firms cannot influence the prices on their own and their average revenue curve and demand curve is in a straight horizontal line which is at the price level. Moreover, the marginal revenue curve overlaps the average revenue curve, as additional units of output are sold at the same prices. In this case, firms decide equilibrium output by comparing marginal revenue and marginal cost (Sharma 2020). The equilibrium is at the point where marginal revenue equals marginal cost and the marginal cost cuts marginal revenue from below.
The above mentioned diagram illustrates the equilibrium in identical cost conditions with OP being the prevailing price in the market and PL being the demand curve, or the marginal and average revenue curve of the firm. Here, marginal cost curve cuts marginal and average revenue curve at F and E. F is not the equilibrium point as to be the equilibrium, since the marginal cost curve cuts the marginal revenue curve from below condition is not satisfied. Firms, in this case, will increase production for more profit as marginal revenue is bigger than the marginal cost (Walker 2020). Therefore, the equilibrium point is E, since marginal revenue and marginal cost at this point are equal. Hence the two conditions for equilibrium in perfect competition are as follows:
MC must be rising at the point of equilibrium
Another important aspect of market condition is the ability of firms to exercise their power to influence prices. Even though firms cannot influence prices in perfect competition, it is important to review the way market power in Irish bookselling industry can work and contribute towards the competitive advantage of firms.
Market power is referred to as the ability of an individual firm or a group of firms to maintain and raise prices above the level which would have prevailed under normal competition. This is the ability of a firm to manipulate the price of the goods in the market by manipulating the supply, demand or both (Vives 2020). This can only be used by a company with considerable market power, which can manipulate prices and control its profit marketing. This, in turn, can also help to increase obstacles for new entrants in the market, and large who have this kind of power are also described as “price makers”, as they can adjust or establish marketplace prices without relinquishing their market share (Kaplow 2016).
Such a power is not available for any player in the state of perfect competition, as there are many companies and there is not a single firm which has significant market share. This is why they are “price takers”, rather than “price makers”. The opposite of this market structure is a monopoly, in which a single company controls the market or at least a significant portion of the market (Khan and Vaheesan 2017). Therefore, in the monopoly market structure, the dominant firm can manipulate the market prices at will. However, it should also be noted that government authority usually restricts the ability of such firms to engage in anti-competitive practices (Van Reenen 2018). Furthermore, oligopoly, which is another form of market structure can also give market power to firms. In an oligopoly, the market is dominated by a small number of firms and there are significant barriers for entry into the market. Under this market structure, firms can collide with each other and can gain market power (Kaplow 2016).
Hence, it can be said that the more competitive a market is, the less market power firms have, and in contrast to this, the less competitive a market is, the more market power firms get. Also, even though the paper uses the term prices, market power is not limited to changing prices, for instance, having unique better resources is also a market power. Simply put, anything which provides a competitive advantage to firms can be referred to as market power (Vives 2020). In terms of bookselling, since firms cannot compete in term of prices, one of the ways to gain competitive advantage is through copyrights. Copyright refers to the right which is provided to publishers and authors so that they can decide the way their creative work is supposed to be used. This restricts other publishers to publish the same book and allow the firm to get exclusive right for publishing. This can be regarded as a market power in book publishing as it gives a competitive advantage to firms by inhibiting other firms to produce the same books (Van Reenen 2018).
Another macroeconomic factor which impacts a market is the volatility of the exchange rate in the economy (Bussiere, Gaulier and Steingress 2020). Exchange rate refers to the value of one country’s currency in respect of the currency of another economic zone or nation. Fluctuations in the exchange rate can be caused by several different factors such as relative demand and supply for currencies, inflation outlook, economic growth of countries, capital flows and others. Currencies fluctuate with the continuous changes in these factors and have a wide-ranging impact on the economy. One of the major impacts of such fluctuations is the shift in the value of trading goods. Usually, a weaker currency makes imports expensive and stimulates exports, which consequently decreases the trade deficit. On the other hand, strong currency makes imports cheaper and reduces exports which widen the trade deficit (Barguellil, Ben-Salha and Zmami 2018).
Exchange rates have a substantial impact on the competitiveness of Ireland, as favourable changes in the exchange rate make Irish firms more cost-competitive and make the country trade effectively in international markets. Exchange rate volatility is also important for Ireland as it does not have any direct control over exchange rates (Bussiere, Gaulier and Steingress 2020). A weak Euro leads to Irish exports becoming more competitive in the international market. In comparison with other EU members states, Ireland has a bigger share in a trading activity outside the Euro region with US and UK being the biggest trading partners (Asteriou, Masatci and Pilbeam 2016). Therefore, the value of the Euro in respect of Sterling and Dollar plays a vital role in shaping the international competitiveness of Irish exports. In the last decade, the relative value of Euro has been the major driver behind the improvement in Ireland's cost base. Additionally, this, coupled with low inflation has helped Ireland facilitate record level of export growth and has boosted the nation's competitiveness (Pino, Tas and Sharma 2016).
In respect of the books market, changes in exchange rates significantly impact the industry as around 60 per cent books sold in Ireland are published in the UK (Barguellil, Ben-Salha and Zmami 2018). Therefore, changes favourable for Irish exports can increase the cost of foreign publishers and can support local ones. However, till date this has not deterred Irish customers to read books of foreign publishers, for instance, foreign publishers like PRH and Hachette Grp are the leading players in the market, while the top domestic publisher such as Gill Group is fairly behind (Pino, Tas and Sharma 2016). This is true in every genre of book and the growth of both foreign and domestic publishers is also quite equal. Therefore, the exchange rate in itself is not something domestic publishers can rely on in terms of market competitiveness and need to improve the quality of their offerings. With the value of Sterling remaining below its long-run average against the Euro, the recent appreciations of the Euro can disrupt exchanger rates. Thus, a major proportion of SMEs of Ireland needs to ensure that suitable risk mitigates measure are in place and that they cost base is sustainable.
The report suggests that the Irish book publishing industry is of low concentration which suggests that this is a highly competitive or perfectly competitive market. This means that there is perfect knowledge in the market regarding the products and is freely available to all participants. No single firm can influence the market conditions or market price and individual firms are considered as price takers. Moreover, the industry is in perfect competition. Perfectly competitive market structure is a hypothetical market in which competition is at its highest, that makes this structure most beneficial for society and consumers. Also, even though firms cannot compete in terms of prices, they can use marketing and better service to attract customers. However, since the information is easily available in this market, competitors can quickly change their operations and can remove the competitive advantage of others. In terms of market power, firms in the Irish book publishing industry cannot influence prices but can use tools like copyrights to get exclusive rights and to gain competitive advantage. Lastly, changes in exchange rates significantly impact the industry as around 60 per cent books sold in Ireland are published in the UK. Therefore, changes favourable for Irish exports can increase the cost of foreign publishers and can support local ones. However, to date, this has not deterred Irish customers to read books of foreign publishers.
Asteriou, D., Masatci, K. and Pılbeam, K. 2016. Exchange rate volatility and international trade: International evidence from the MINT countries. Economic Modelling, 58, pp.133-140.
Azar, J., Marinescu, I. and Steinbaum, M. 2020. Labour market concentration. Journal of Human Resources, pp.1218-9914R1.
Barguellil, A., Ben-Salha, O. and Zmami, M. 2018. Exchange rate volatility and economic growth. Journal of Economic Integration, 33(2), pp.1302-1336.
Bogue, J., Collins, O. and Troy, A.J. 2017. Market analysis and concept development of functional foods. In Developing new functional food and nutraceutical products (pp. 29-45). Academic Press.
Bussière, M., Gaulier, G. and Steingress, W. 2020. Global trade flows: Revisiting the exchange rate elasticities. Open Economies Review, pp.1-54.
Farmar, T. and Kostick, C. 2018. The history of Irish book publishing. United Kingdom: The History Press.
Hill, S. 2016. Managerial economics: the analysis of business decisions. United States: Macmillan International Higher Education.
Kaplow, L. 2016. On the relevance of market power. Harvard Law Review, 130, p.1303.
Khan, L.M. and Vaheesan, S. 2017. Market power and inequality: The antitrust counterrevolution and its discontents. Harvard Law & Policy Review, 11, p.235.
Krivka, A. 2016. On the concept of market concentration, the minimum Herfindahl-Hirschman index, and its practical application. Panoeconomicus, 63(5), pp.525-540.
Manna, E. 2017. Exercises on Perfect Competition, Monopoly, Market Structure and Market Power.
[Online]. Available at http://diposit.ub.edu/dspace/bitstream/2445/114849/1/Exercises%20on%20Perfect%20Competition%2C%20Monopoly%2C%20Market%20Structure%20and%20Market%20Power.pdf [Accessed on 23rd July 2020].
Pino, G., Tas, D. and Sharma, S.C. 2016. An investigation of the effects of exchange rate volatility on exports in East Asia. Applied Economics, 48(26), pp.2397-2411.
Shaikh, A. 2016. Capitalism: Competition, conflict, crises. Oxford University Press.
Sharma, S.P. 2020. Unit-1 Perfect competition: firm and industry equilibrium. Indira Gandhi National Open University, New Delhi.
Van Reenen, J. 2018. Increasing differences between firms: market power and the macro-economy. [Online]. Available at http://eprints.lse.ac.uk/91698/ [Accessed on 23rd July 2020].
Vartale, M. 2020. Features of Perfect Competition. [Online]. Available at http://studymaterial.unipune.ac.in:8080/jspui/bitstream/123456789/6449/1/Features%20of%20Perfect%20Competition.pdf [Accessed on 23rd July 2020]
Vives, X. 2020. Common ownership, market power, and innovation. International Journal of Industrial Organization, 70, p.102528.
Walker, P. 2020. Foundations of Organisational Economics: Histories and Theories of the Firm and Production. [Online]. Available at https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=3525434 [Accessed on 23rd July 2020].
Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help
Proofreading and Editing$9.00Per Page
Consultation with Expert$35.00Per Hour
Live Session 1-on-1$40.00Per 30 min.
Doing your Assignment with our resources is simple, take Expert assistance to ensure HD Grades. Here you Go....
Min Wordcount should be 2000 Min deadline should be 3 days Min Order Cost will be USD 10 User Type is All Users Coupon can use Multiple