2.5.3 The Competitive Environment Flashcards
A market dominated by a single business, described as a monopoly, is bad for consumers because:
Consumers have little choice.
• Prices tend to be high.
• There is little incentive for the dominant firm to innovate or provide
great customer service.
What is a monopoly
A monopoly is a single
business that dominates
supply in a given market.
Oligopoly
An oligopoly is the name
given to a market dominated
by just a few major
suppliers.
In an oligopoly market,
rivalries are intense, as it is clear that in most
cases one firm can only gain market share by directly taking it from one
of just a handful of rivals.
Given the intense rivalries, it may appear odd that companies in an
oligopoly rarely compete on price. The reason is that they fear a price war
would start, leading to lower profit margins for all in the industry. Instead,
non-price competition exists, focusing on aspects such as:
branding • product features • product design • advertising • technical innovations.
The fiercely competitive market
These markets tend to be characterised by many small businesses
competing with one another, often on the basis of price. This keeps profit
margins low and ensures consumers usually get a bargain. However, a
business that is able to find an effective method of differentiation within a
fiercely competitive market will stand a far better chance of success.
Many of these markets tend to be for commodity products which, by
definition, are hard to differentiate. For businesses selling these, there
may be little choice of strategy other than keeping costs as low as possible
in the hope of undercutting rivals’ prices and still making some profit.
Big markets market size
Larger markets, even those with a few fairly dominant firms, offer scope for
new competition, usually through carving out a niche. Therefore in a large
market there is likely to be a fair degree of competition. This is likely to keep
even dominant producers from becoming complacent, as they recognise the
need to offer good service to avoid opening an opportunity to a rival.
Small markets
In a smaller market, with fewer customers and lower total sales, it may be
easier to build up barriers to entry, carving up the market between just a
few businesses.
Markets whose size is changing
Markets tend to grow or shrink in size over time. Predictably, the
direction of this change in size will affect the level of competition:
• Growing markets … attract new entrants … seeking higher profits on offer.
• Shrinking markets .
. see established firms exiting … as profitability
tends to be low and thus unattractive.
Business responses to a tougher competitive
environment
Price cutting, increased product differentiation, collusion
Price cutting
Atracting new customers, or hanging on to existing customers, could
be achieved by cutting the selling price. Unless this is accompanied by
cutting the costs of production, profit margins will fall. This is why price
cutting is rarely a successful long-term answer.
Increased product differentiation
Finding or stressing new ways to show that our product is different to
Those of our existing or new rivals is likely to be the key to success in a
tougher environment. Methods of product differentiation could include:
• branding
© product features
• product design
• advertising
• technical innovations.
Collusion
Collusion occurs when two or more rival businesses agree to fix supply or prices within their market. This is illegal.
Impact of competition- nature of ownership
If there is an increase in competition then other businesses may try and change their nature of ownership if they have unlimited liability to either a LTD or a PLC. This is due to the fact that the increase in competition is likely to increase the number of businesses that fail. Furthermore they may do this in order to expand so that they are able to retain their market share.
Impact of competition- product range
Businesses may try and increase their product range as competition increases in order to spread risk. Therefore if one product was to fail then the business is able to rely on others in order for them to remain profitable.
