Competitive and Concentrated Markets

What is a market?

A way of bringing together buyers and sellers to buy and sell goods and services. Either physical or electronic

What are market structures?

How market operate to enable buyers and sellers to come together

What are the main 3 types of market?

Monopoly, oligopoly, competitive

What are the characteristics of a monopoly market?

Price-maker, not efficient due to lack of competition, no substitutes, high barriers

What are the characteristics of an oligopoly market?

Can influence price but restrained by rivals reactions, not economically efficient, fairly high barriers

What are the characteristics of a competitive market?

Price-takers (set by S&D), economic efficiency due to competition, non-price differentiation, no barriers to entry

What is market share?

The sale revenue that a firm receives as a proportion of the total market

What is concentration ratio?

The percentage of market share taken up by the largest firms- could be any number

What is the purpose of concentration ratios?

Used to determine the market structure and competitiveness of the market

What is competition?

A market situation in which there is a large number of buyers and sellers

What are competitive markets?

Market structure where there is a great deal of competitions between firms

Why will firms try to be efficient?

To lower costs leading to the ability to lower prices

Why do producers compete?

Enter a market, Survive in a market, make a profit

How do firms/producers compete in a competitive market?

Price competition: lower prices gain customers & market share
Non-price competition: specialist services e.g. customer service

What is product differentiation?

How firms make a product/service different to those of its competitors

What can non-price competition lead to?

Customer loyalty

What is the economic impact of competition on producers?

Improved efficiency, greater demand leads to greater profits, slow to adapt will be forced out of the market

What is the economic impact of competition on workers?

New technology/cost cutting leads to job loss

How does quality affect the economic impact of competition on consumers?

Improved quality with new/improved features, good customer service

How does value affect the economic impact of competition on consumers?

Best quality for the lowest price

Competition in firms leads to fall in price

How does choice affect the economic impact of competition on consumers?

Different products from different firms

Different versions of the same product

What is creative destruction?

The incessant product and process innovation mechanism by which new production units replace outdated ones

What is consumer sovreignty?

When individuals have the spending power to choose what they want to buy and influence what's produced

What are the benefits of competitive markets in regards to QVC?

Better quality

Lower prices

Greater choice and variety

What are the problems of competitive markets in regards to QVC?

Cost cutting to ensure price competition

Pressure to lower prices leads to unethical practices

Customer confusion when there's too much choice

What are the characteristics of a non-competitive market?

Power of firms: high percentage of output - influence market price

Ease of entry/exit: incur high costs and high losses when leaving

Number of firm: small number - not much competition

What is a monopoly?

Where there is one dominant firm in the market. Only provider of a kind of product/service. E.g. the Underground

Why do monopolies exist and give examples?

Barriers to entry:

Legal ones

Greater efficiency than potential rivals due to e.o.s

Location

Copyrights & patents

What is an oligopoly?

Where there are a few dominant firms who have a large share of a particular market

How do oligopolistic markets operate?

The larger firms set the prices and the smaller firms adapt

How do oligopolies try to control the market?

Through collusion, when multiple firms set a price together to avoid price competiton.

It's illegal

What is regulation?

Looking to control the conduct of firms through law enforceable rules

What is the CMA?

Competition and Markets Authority

Non-ministerial government department in the Uk, responsible for strengthening competition and preventing non-competitive activities

What are 2 reasons for gaining market power?

Invention and innovation

What are the 'BIG' reasons for gaining market power?

Barriers to entry - difficult for new firms to challenge incumbents

Integration - when two businesses become one via a merger or takeover

Geographical reasons - simpler for one firm to serve one area

What are the 3 types of barriers to entry? Describe them.

Structural barriers - production cost differences

Strategic barriers - different pricing policies

Statutory barriers - given force of law

What is the impact of high R&D costs?

Signal of financial reserves, to compete new entrants would need match/exceed this, deters entry

What is the impact of predatory pricing?

Deliberately lowering prices to force rivals out

What is the impact of high switching costs?

Involve cost of purchasing/installing new equipment, effort involved, common when switching energy suppliers, structural in nature but also strategic

What is integration

When two businesses join together via takeover or merger

What is the impact of exclusive contracts, patents and licences?

Protect existing firms and means that suppliers and retailers can exclude other retailers from entering the market

What is a horizontal integration?

Taking over a potential rival by purchasing significant shares to gain interest, or by a complete buy-out. CMA may prevent this

What is a vertical integration?

Can 'tie up' supply chain and make life difficult for potential entrants

What are the benefits of non-competitive markets in regard to QVC?

High profits allow more R&D into better products

Large dominant firms have the size to charge lower prices

Firms are so big they provide choice within their business

What are the problems of non-competitive markets in regard to QVC?

Incumbent firms have less incentive to improve

Incumbent firms have less need to reduce prices (less entry threat)

Less firms mean less real choice

What is the impact of non-competitive markets on consumers in regards to quality?

Incumbent firms have less incentive to improve

Less R&D

Worse customer service

Less creative destruction

What is the impact of non-competitive markets on consumers in regards to value?

Incumbent firms have less need to reduce prices

Able to make supernormal profits

What is the impact of non-competitive markets on consumers in regards to choice?

Less firms mean less real choice

Many brands by all owned by a few companies

What is a supply chain?

A network of firms that work directly and indirectly to move a good/service from production to the final consumer

What is a monopsony?

A market situation in which there is only one dominant buyer.

What are the benefits of non-competitive markets on suppliers?

More stable contracts

Easier to produce for one firm - know what they want, only deliver to one firm

What are the drawbacks of non-competitive markets on suppliers?

Receive lower price due to dominant position

Get paid late or have poor terms and have to be flexible