4.4 – Competition and Monopoly Flashcards
Why do firms compete?
Firms compete in the market to increase their customer base, sales and market share and profits. All of this will give them a better image and reputation in the market.
What is Price Competition?
Competing to offer consumers the lowest or best possible prices of rival products
What is Non-Price Competition?
Competing on all other features of the product (quality, promotional campaigns, attractive displays, after-sales care, warranty etc) other than price.
What is Informative Advertising?
Involves providing information about the product to consumers. Examples include advertising of phones, computers, food ingredients etc.
What is Persuasive Advertising?
Designed to create a consumer want and boost sales of the product. Examples include perfumes,clothes, chocolates etc.
What can influence the price that producers fix on a product?
Level and strength of consumer demand
The amount of competition from rival producers in the market
The cost of production and the level of profit required
What is Price Skimming?
When a new and unique enters the market, it’s producers charge a very high price for it initially as consumers will be willing to pay for the new product. As more competitors launch similar products, producers may lower prices.
What is Penetration Pricing?
When producers set a low price which encourages consumers to try the product and expand sales and increase loyalty. This way, the product is able to penetrate a market, especially useful when there are a lot of existing rival products.
What is Destruction Pricing?
Where prices are kept very low (lower than the cost of production per unit) in order to ‘destroy’ the sales of existing products, as consumers will turn to the lowest priced products. Once the product is successful, it can raise prices and cover costs.
What are Price Wars?
Happen when competing firms continually trying to undercut each other’s prices.
What is Cost-Plus Pricing?
This involves calculating the average cost of producing each unit of output and then adding a mark-up for profit (extra value).
Price = (Total Cost/Total Output) + Mark-up profit.
This is used to cover the cost of production of the products and generate a profit.
What happens in a Perfectly Competitive Market?
There will be many sellers and many buyers. As there is fierce competitions, producers nor consumers cannot influence market price- they are all price takers.
What are the Advantages of a Perfectly Competitive Market?
High consumer sovereignty: consumers will have a wide variety of goods and services to choose from.
Low prices: as competition is fierce, producers will try and keep prices low.
Efficiency: to keep profits high and lower costs, firms will be very efficient.
What are the Disadvantages of a Perfectly Competitive Market?
Wasteful competition: In order to keep up with other firms, producers will duplicate items
Mislead customers: To gain more customers and sales, firms might give false and exaggerated claims about their product.
What are monopolies?
Dominant firms who have market power to restrict competition in the market.
