Question

1) How can excessive market concentration harm consumers? Particularly write about and articulate how individuals are harmed at the micro level (think in terms of opportunity cost).

2) How can Luxottica's position as the dominant firm in the optical market be challenged

Answer 1

1) Market concentration refers to the proportion of market share held by the top few firms in an industry. The higher the market concentration the greater the share of the market held by the top few firms. This is a problem for consumers as this means that the top few firms control prices and also there is a limit on the choices that are available to consumers. Higher concentration ratios will also mean barriers to entry for other firms and this will limit the choices for consumers in the industry. Thus high concetration ratios is a problem.Consumers pay higher prices on a day to day basis, have less choice available and also quality suffers as dominant firms become complacent.

2) Luxotica is a dominant Italian brand. It can only be challenged if new firms come about with improved technology and this helps them to produce at lower costs than Luxottica. This will cause the leader firms sales to be squeezed and hence this will also mean lower profits. New firms can also come up with better ad campaigns and novel products to try and snatch away market share.