2.5.3 The Competitive Environment

the competitive environment

the competitive environment is the degree of competition in the market and the buying and selling power of customers and suppliers within that market

market structure

the number of firms within an industry and the way in which those businesses behave e.g. differentiating products

monopoly occurs when one firm dominates the market

occurs when one firm dominates the market

oligopoly

occurs when a few firms dominate the market

monopolistic competition

occurs when there are many firms in the market but there is some form of product differentiation

market structure

the number of firms within an industry and the way in which those businesses behave e.g. differentiating products

Perfect competition

Market Structure	Perfect Competition
Number & Size of firms	Many small firms, none dominant
Nature of Product	Identical, no difference between brands
Examples	Fruit farming, wheat markets
Barriers to entry	None, easy to enter and leave
Effect on business	No price control, must accept market price

Monopolistic competition

Market Structure	Monopolistic Competition
Number & Size of firms	Many small firms, some local power
Nature of Product	Slightly differentiated, similar use
Examples	Hairdressers, cafés, local shops
Barriers to entry	Low, but some costs and branding needed
Effect on business	Some price power, focus on differentiation

oligipoly

Market Structure	Oligopoly
Number & Size of firms	Few large firms dominate most of the market
Nature of Product	Similar or differentiated, heavy branding
Examples	Petrol stations, UK supermarkets
Barriers to entry	High – expensive, strong brand loyalty
Effect on business	Prices often stable, focus on non-price competition

duopoly

Market Structure	Duopoly
Number & Size of firms	Two large firms dominate together
Nature of Product	Usually differentiated, niche competition
Examples	Airbus & Boeing (planes)
Barriers to entry	High – high costs and limited space
Effect on business	Strategic pricing, risk of collusion

monopoly

Market Structure	Monopoly
Number & Size of firms	One firm has total market control
Nature of Product	Unique product, no close substitutes
Examples	Royal Mail (before competition), water supply
Barriers to entry	Very high – legal, cost and brand barriers
Effect on business	Sets prices, little competition – risk of inefficiency

competitive advantage

a feature of a business that allows it to perform more successfully than others in the market

business will employ many tactics and strategies to compete, these could include:

• New product development

• Changing/improving existing products

• Promotions

• Changing prices

• Improving distribution networks including online sales

• Quality assurance

• Improved customer service – staff training

market size

the total sales value or sales volume in a given market

market size can be calculated as

• Number of units sold x price

  • E.g. If there are 2 million cars sold at an average price of £15 000 then the market size is (2 million x £15 000) £30 billion

• This can also be expressed as the number of buyers or sellers in a particular market

• as a market grows in size this might attract increased competition as new firms see it as an attractive market to enter