B

Market profitability d^ik> 0

increasing

decreasing increasing

Competitiveness dcj - d C < 0

decreasing dcj- dc > 0

Figure 4.4. Changes in competitiveness and market profitability (homogeneous production costs) (a) Increasing average unit production cost (b) Decreasing average unit production cost cannot infer anything about the change in competitiveness if profitability is falling in the first case, or rising in the second. Furthermore, homogeneity of unit production costs is a very strong assumption that is unlikely to be justified in practice.

A change in the mix of the country's revenues between markets will have no impact on overall profitability if there is no variation in profitability between markets, or if all markets experience the same growth in revenue. However, in general, this will not be the case and the overall sign of the mix effect will depend on the relative percentage changes in revenue for each market. If revenue growth is greatest in markets with below average profitability, then the overall impact will be negative. If the reverse is true, it will be positive. The relative growth rates will depend on a range of factors (i.e. parameter values) and it does not follow that an increase in competitiveness will necessarily lead to greater (or smaller) increases in revenue in more profitable markets. Consequently, there is no predictable relationship between changes in competitiveness and changes in profitability due to mix effects.

Finally, the change in profitability due to the change in the significance of the aggregate fixed cost depends on the change in the country's total revenue. In the special case where there are no changes to the values of the choke prices in any of the markets (i.e. dak = 0 for all k e K), then if average unit costs are rising globally (i.e. dc > 0), a sufficient condition for the fixed cost effect to be positive (i.e. improve overall profitability) for country j e J is that:

Similarly, if unit costs are falling globally (i.e. dc < 0), then a sufficient condition for the fixed cost effect to be negative for country j e J is that:

However, while these conditions are sufficient, they are not necessary. Furthermore, they rely on the assumption that the markets are static (i.e. the choke prices do not change in any markets). In general, the overall impact on a country's total revenues is unclear. They may fall in some (or all) of its markets when it is gaining competitiveness, and they may rise when it is losing competitiveness. So again there is no predictable relationship between changes in competitiveness and changes in profitability due to fixed cost effects.

Thus, in general all three components of the change in profitability can move in either direction as a sector gains or loses competitiveness. Only under a number of restrictive assumptions can changes in a country's profitability provide a good indicator of changes in competitiveness.

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