2.5 Competition

Competition

Where different firms are trying to sell a similar product to a consumer

Homogenous vs Differentiated goods

Homogenous: Where products are identical and it is impossible to know whether the product came from one or the other eg metal

Differentiated: A product has ben distinguished from competing products, to make it more attractive to a particular target market eg clothes

Why producers compete: market entry

- A new business may advertise or offer their product at a lower price to attract consumers and force existing competition to respond

- This may be the case for an existing firm selling new products to new target markets

Why producers compete: Survival

Usually compete for consumers or market share - achieved normally through extending the existing product range

Why producers compete: Profit

Profit is essential for survival and growth as profit can be reinvested into the business for expansion and innovation

Price competition

Firms lower their prices to gain customers and market share

- They must be careful as they can't sell at a price that doesn't cover their unit costs for any length of time - this may lead to business failure

Non price competition

Any methods used by a firm to attract customers that doesn't involve lowering price

- Offering a specialist good/service

- Location and convenience

- Branding

- Advertising

- Ensuring excellent quality

- This usually builds brand loyalty

Features of a competitive market

- Large number of producers (typically smaller) and consumers

- Similar or homogenous goods

- Greater efficiency

- Lower prices so firms have to take the market price

- Low barrier to entry (new firms can set up in market)

Impact of competition on producers

- Efficiency: Increase efficiency and productivity of factors of production to enable price cuts

- Innovation: Find ways to innovate eg improve product - also allows producers to remain competitive

- Closures: Some producers who are slow to adapt to changes in tech/consumer demands may be forced to leave market/fail

- Production methods: Improved production methods - increasing efficiency - firms can respond faster to orders/better service

- Workers... redundancies?: Demand for labour may fall - robotics and tech replace the need for workers and is a key way of reducing costs

Impact of competition on consumers

- Prices: More competition tends to lead to lower prices and improved quality of products/customer service

- Choice: Innovation increases choice of goods/services available

- Quality: Since all competitors are smaller, no firm will benefit a lot from economies of scale therefore prices may be higher for consumers

- Over consumption: There may be increased consumption of goods/services which are dangerous causing negative effects

- Consumer sovereignty: The desires and needs of consumers control the output of producers, leading to higher standard of living

Monopoly definition

A situation in which the market is dominated by 1 producer of a good or service

Legal definition of a monopoly

A monopoly occurs if a firm has a market share of at least 25%

When is a monopoly evident?

This situation is evidence that there is an inefficient allocation of resources by the price mechanism (demand and supply)

Features of a monopoly

- Firms in a monopoly market are usually very large

- There is only 1 firm however the legal definition means any business with over 25% market share has a monopoly

- High barriers to entry

- The firms set the prices but have no control over quantity demanded in a market (price maker)

- Theoretically, a monopoly will charge higher prices and produce similar quantities

- Usually less efficiency as do not face competition but monopolies can achieve large economies of scale making them more efficient

Barriers to entry - protecting monopolies

- Legal barriers: e.g patents and copyright which prevent other firms copying the idea or name

- Marketing barriers: e.g heavy advertising expenditure which makes it difficult for new firms who cannot afford the same expenditure

- Economies of scale: the monopolist has low average costs and therefore lower prices which new firms cannot compete with

Benefits of a monopoly (generally for producers)

- The firm should make higher profits as they can charge higher prices to consumers due to lack of competition

- The firm may use these profits to invest in R+D to develop new products or improve existing products (to continue their competitive advantage) - benefit for consumers

- International competitiveness can be increased as UK firms can compete with cheaper imports

- Due to economies of scale, average costs are lower so firms choose to lower prices to consumers

Drawbacks of a monopoly (generally to consumers)

- Consumers may pay higher prices due to the lack of competition

- Consumers may have less choice

- Firms may not be very efficient with their resources because there is no competitive pressure to reduce costs to lower prices

- Less innovation (new products) as little competition

- Quality may be low but consumers may have little or no choice

Oligopoly

A situation in which the market is dominated by a few large producers of a good or service

for e.g the uk supermarket industry

Features of an oligopoly

- Large % (>50% usually) of the market share belongs to the leading firms

- Firms produce similar but similar but branded produce so non - price competing factors matter in a oligopolistic market

- Barriers of entry exist but usually not sufficient to prevent other firms entering he market

- Interdependence between firms ie firms must take into account likely reactions of competitors before making pricing and investment decisions

- Firms try to control the market through collusion - they get together and agree to set the price so that they can avoid price competition (illegal)

Benefits of an oligopoly

- Firms should make higher profits than in competitive markets - mainly due to lower production costs and economies of scale

- Consumers benefit as have variety of choice and can make price comparisons

- Consumers benefit if firms reinvest profits into R+D

- Less likelihood of unjustified price increases since the firm increasing price may lose market share to competitors

Drawbacks of an oligopoly

- Choice is still restricted compared to competitive markets so consumers have little power over choices

- Prices may be higher for consumers as firms may collude to set the market price (illegal in the UK)

- Smaller firms may struggle to establish themselves since barriers to entry are high, reducing potential competition

- Firms must always consider competitors' responses when making decisions - more time consuming to take decisions