Impact of Competitive Market Structure

BUSS4 - Competitive

What is a competitive market? A competitive market could be described as

one where there is intense rivalry between producers of a similar good or service

The number of firms operating within the firm influences the intensity of competition

The size of the firms within the market needs to be taken into account: if one firm has 60% and the other 40% is shared by the others the market may not be very competitive

Similarly if a market comprises of 4 firms with similar market share the market will be fairly competitive

Consumers enjoy lower prices and better quality when markets are competitive

Firms find their profit margins squeezed Firms operating in competitive markets try hard

to minimise the competition by creating a USP or stopping new entrants with predatory pricing

The degree of competition within a market Monopoly Some markets are dominated by one

firm The legal definition of a monopoly in

the UK is a firm that has a market share of 25% or above

Monopolies are argued to be bad for consumers because they can set high prices and restrict choice however they are able to invest profits into research and development and create new innovative products

In markets dominated by a single large business firms do not need to spend heavily on promotion; they will focus on investing in their product

Apple (the market leader in MP3s) will spend millions on R&D

The degree of competition within a market Oligopoly An oligopoly is a market that is dominated by

a handful of large companies There may be lots of other small companies

but they have very little market share between them

The supermarket industry in the UK is a good example of this

The rivalry between these firms is very intense They are all very interdependent – their

actions will have an affect on the others Although supermarkets focus a lot of attention

on prices, firms in these markets tend to focus on non-price competition

If they reduce their price others will do the same, customers will stay where they are and they will all lose revenue

If one firm puts up their price then customers will move to a competitor

Either way the firm loses out so, in theory, they will tend to do nothing.

The degree of competition within a market A fiercely competitive market Tends to be made up of

hundreds of relatively small firms

They are likely to have near identical products like commodities

Rivalry will be intense Price is likely to be most

important Production costs will need to be

managed carefully Without price cuts market share

is likely to be lost Competition in the Indian

restaurant industry is extremely fierce

P327

Responses of businesses to a changing competitive environment If a market becomes more competitive there

are many ways in which firms can react Price cutting

Price cutting may fight of a competitor but it may need cost reduction to preserve profit margins

If margins are already low it may not be possible

Increase product differentiation This can avoid cutting prices

Changing a design Strengthening the brand image Redesign with unique features Improving quality

Find new markets If a business is struggling in one market it

may look for another (Tesco opening superstores in Eastern Europe)

Responses of businesses to a changing competitive environment Takeover

Try to takeover the successful competitor Cadbury purchased Green & Black Google purchased Youtube Government is supposed to stop takeovers that crush competition but their

record of doing so is not good Predatory pricing

A firm cuts its pricing to undercut the rival This is normally done by dominant firm to force the smaller firm to close down It is illegal but still common because the fines do not outweigh the benefits of

doing it

EvaluationThe best way a business

can ensure its survival in a competitive world is to find something it is good at and stick to it

The problem is that business leaders often make decisions based on ego rather than logicShould Tesco have moved

into the US with fresh&easy or tried to get into China?