University of California
Type of paper: Thesis/Dissertation Chapter
Leisure Industry Competition
1. Discuss using examples from a leisure industry of your choice, the extent to which competition creates efficiency. There are many ways in which a firm or leisure industry can be considered to be efficient. First of all they may be productively efficient. This is where they would be operating at their lowest average cost, meaning they are benefiting from all economies of scales and experience no diseconomies of scale. They particularly must avoid any waste of factors of production. Allocative efficiency exists when the firm is operating where Price is equal to Marginal Cost. When a firm or industry is allocatively efficient this means they are producing what society wants and allocating resources to increase both output and quality. This may be in the form of specialisation. If dynamic efficiency exists this means that the firm or industry is experiencing abnormal profit. Their aim must always be to increase output in the future often by investing in research and development, such firms are often benefitting from monopoly power. Pareto efficiency is where production of one good can increase without the production of another decreasing.
I believe that increased competition will create productive efficiency. This is because if there is increased competition through an increase in the supply of for example entertainment channels entering the TV broadcasting industry this will result in firms having the reduce their prices of advertising slots due to the potential fall in the number of viewers. This will mean that they are now price takers in the market and as a result their revenue will decrease. As the firms are profit maximisers they will be unsatisfied with their revenue falling and as a result they will need to reduce their average cost in an attempt to maintain their previous profit level. They will reduce their average cost by avoiding any waste of factors of production in the production of the good/service and in order to do so they will often reduce their output of any new television programmes as there is a potential that they may be unsuccessful and as a result viewers will often see an increase in the number of repeats of television programmes. They will also decrease their output of new programmes in order to stop any potential diseconomies of scale and improve communication in the production of their good/service.
Therefore at this point I believe that in the leisure industry firms such as ITV have become more productively efficient as a result of increased competition. Some firms also have the ability to attain economies of scale. An example would be SKY who obtained technical economies of scale by the introduction of 3D and HD boxes, and purchasing economies of scale by the purchase of previously unavailable channels and programmes such as HBI and the FA cup. Attaining these economies of scale reduced SKYs average cost leading to them being more productively efficient. This further backs up my point that increased competition does result in greater efficiency. However, it could be argued that this is dependent upon the scale of competition. For example, when Channel 4 and Channel 5 first entered the market this was not the case, meaning efficiency did not increase. However, as these channels have become more well established this is now the case. One could also argue that this is also not the case for the BBC due to the fact that they are funded by the Government and do not compete on price.
The BBC is a public monopoly but they are certainly not efficient. The BBC is not cutting costs in order to become more productively efficient; the Government is reducing their funding therefore this has created the need for the company to be more productively efficient. They are doing this in a number of ways such as moving production from London to Manchester as it is cheaper and therefore will reduce their costs. Therefore increased competition is not the factor that is causing the BBC to become more productively efficient – Government intervention is. This leads me to the conclusion that the greater the number of firms the more likely they are to increase productive efficiency. But increased competition is not the only factor; government intervention must also be considered.
In the leisure industry there is always a need for Travel Agents to be allocatively efficient, this is because it is vital that they produce what society wants. If it was the case that certain Travel agents were not providing the holidays that consumers wanted this would simply result in holiday makers going elsewhere. This is especially the case at present because barriers to entry/exit have decreased meaning new firms are entering the market all of the time due to improved communication. This has increased competition mainly due to the internet as many travel agents and comparison websites have set up online to compare the best deals, which increases the power to the consumer as they are no longer required to visit the main four travel agents. This has resulted in a greater need for travel agents to avoid mis-allocation of their resources by decreasing the number of planes and destinations. This is because if they do not allocate their holidays to societies needs their Marginal Cost will increase above their price. Therefore increased competition leads to an increase in the need for firms to allocate resources to what society needs and ensure that they are increasing their quality and output to become allocatively efficient.
We have established that increased competition will inevitably result in increased output; however it will also increase external costs. For example in eco tourism, if output increases in visits to the rainforest this will cause a major increase in the number of negative externalities. Therefore in this case it would be beneficial to decrease the output of such visits in order to reduce negative externalities. In fact I would argue that a monopoly provider of eco tourism holidays would be the most beneficial for the environment as they might produce holidays at the social optimum level. Taking these factors into consideration I strongly believe that increased competition will force firms to think about how they can allocate resources efficiently but sometimes at a social cost.
With SKY benefiting from technical economies of scale it could also be argued that by investing in HD and 3D boxes this has also allowed them to become dynamically efficient as their abnormal profits allow them to invest in research and development which allows them to increase output in the future with the same factors of production inevitably leading to monopoly power. This benefits consumers as they are able to consume greater output in the form of 3D and HD programmes or a wider range of channels in the future without the needed for greater factors of production. However, I could argue that this is not in fact them demonstrating greater efficiency as a result of increased competition but rather creating even more barriers to entry for other firms wishing to compete with them in the broadcasting market.
It also could be questioned as to how much of their abnormal profits are actually being invested into research and development as I am aware that the majority of their profits goes to shareholders. Therefore I am led to believe that although theoretically SKYs monopoly power and the lack of competition they face gives them the opportunity to be dynamically efficient; in reality it is questionable as to what will drive competition in the future. Although it could in fact be more competition that will drive future efficiency and not the abnormal profits of just a few firms.
I strongly believe that increased competition is most likely to result in efficiency in the travel market as there are little barriers to entry that current travel agents are able to put up in order to stop competition affecting their profits. This is mostly due to the fact that the internet has allowed many new companies to set up online giving consumers the opportunity to compare prices directly; therefore increasing the need for travel agents to be allocatively efficient making the statement true. However I accept some may argue that if a firm is being allocatively efficient at a social cost they should not be considered to be allocatively efficient and therefore my judgment could be questioned.
On the other hand when firms are not competing on price, like for example the BBC, an increase in competition is not likely to result in them becoming more efficient as decreasing their average cost is not likely to be a priority but instead they are more likely to need to increase the quality of their good or service. In theory I believe that the best way to ensure efficiency in the future is to invest in R+D (creating new barriers to entry like SKY) and the way to get firms to do this is increased competition. In reality this may result in negative externalities or potentially abuse of monopoly power and monopolies may often end up being inefficient in the long run.