Business competition Flashcards
What are the criteria that determine the size of firms
Number of employers
Sales turnover
Capital employed
List the factors that influence the growth of firms
Access to finance
Economies of scale
The desire to spread risk
Government regulation
Increasing market share
Greater security of sales
Greater security of supplies
How does access to finance influence the growth of firms
When firms have trouble finding finance, it is harder for them to grow. This is because they can’t get loans that will help them invest in their business and instead will have to use only retained profits
How do economies of scale influence the growth of firms
Economies of scale allow firms to reduce their average costs when their output increases. This therefore allows them to make more profits, helping them grow
How does the desire to spread risk influence the growth of firms
When firms grow through diversification, it means they invested in a variety of assets in more than one market. This helps businesses grow, because when sales in one market decline, the firms still has sale revenue from other markets
How does government regulation influence the growth of firms
Competition authorities often have a say in mergers and monopolies. They therefore have the power to prevent a firm from growing excessivley
What is the formula for the market share
Individual firms sale revenue / total market sales revenue
What are two ways in which firms grow
Internal growth
External growth
What is internal growth
Internal growth is the growth within the firm. It is slow in comparison with external growth and it’s otherwise called organic growth
What is external growth
External growth is rapid growth which takes place through a merger or a takeover
Give examples of external growth
Mergers
Takeovers
Acquisitions
Joint ventures
What are mergers
Mergers occur when one company agrees to join with another
What are takeovers
Takeovers occur when a firm takes over another by buying its shares and owning 51% of them
What are joint ventures
Joint ventures are agreements between two or more firms to work together on a project
What is forward vertical integration
Forward vertical integration is when one firm joins with another closer to the market
What is backward vertical integration
Backward vertical integration is when a firm joins with another that is closer to raw materials
What is horizontal integration
Horizontal integration is when a firm joins another firm in the same industry and at the same stage of production
What is a conglomerate merger
A conglomerate merger is when a firm joins another firm that produces another product. The firms are in completely different industries and the aim of this integration is to spread risks, otherwise known as diversification
What is a lateral integration
A lateral integration is when firms producing different but related products join together. The products are not in direct competition
List the advantages of being a large firm
Economies of scale: When a company becomes bigger, economies of scale allow them to reduce their average costs. This is because growing in size helps them get finance more easily and buy in bulk
Market domination: Large firms can dominate a market. As a firm gets more recognition by becoming bigger, they can eliminate competition and get monopoly power. This allows them to charge higher prices that enable them to make higher profits
Large-scale contracts: Bigger companies are more likely to get better contracts than small companies. When someone is looking to hire a firm, they tend to hire the biggest ones as they have more resources and better reputation. Thus, larger firms get more costumers allowing them to make more rofits
List the disadvantages of large firms
Bureaucracy: The bigger a company becomes, the more complicated it is to run it. Firms are forced to complete more forms and get more licenses, significantly slowing them down and making them more inefficient
Control: Large firms have many employees who need to be monitored by managers. The more employees, the more managers are needed which is costly because managers are expensive
Poor motivation: Large firms are able to use systems like DOL. If workers are overspecialized and allocated very simplistic tasks, they get demotivated and become unproductive
What are the characteristics of small firms
They are independently owned and run
They are not part of a large chain
They are run in a personalized way by its owners
What are four reasons why firms stay small
The size of the market may be small
The nature of the market (niche)
Lack of finance
Aims of the entrepreneur
What are the advantages of being a small firm
Flexibility: Small firms are usually run by their owners who are actively involved in the business. This allows them to react to change more easily making them more flexible
Personal service: Smaller firms tend to have a smaller customer base. Thus, the owners of the firms are able to communicate with their customers directly, something which allows them to offer them personalized services
Lower wage costs: Workers in small firms usually don’t belong in trade unions. Thus they can’t negotiate a higher salary allowing the owners to pay them very little
What are the disadvantages of being a small firm
Higher costs: Small firms have a smaller output, preventing them from exploiting economies of scale. Thus their average costs tend to be higher than those of their larger rivals
Lack of finance: Small firms struggle to raise finance. This is because they cannot issue shares and it’s harder to get loans from financial institutions when you are not a large, established firm
Difficulty attracting quality staff: Small firms lack resources. Thus they cannot afford the wages of qualified staff, since they ask for a lot of money due to skills
What are market structures
Market structures refer to the degree of competition in a market
What are the three types of market structures
Competition
Oligopoly
Monopoly
Define competition (market structure)
Competition is a market with a large number of small buyers and sellers, with free entry and exit out of the market
What are the advantages of competition
Choice: Consumers have a wider choice of goods to choose from
Quality: Consumer receive better quality goods because if producers supply poor quality goods, they will lose costumer to competitors
Lower prices: In order to attract more customers, suppliers tend to charge lower prices
What are the disadvantages of competition
Lack of research and development: Firms in this type of market don’t make huge profits and they thus can’t invest a lot into research and development to come up with new innovative products. Further, even if they have the funds to do so, they are not motivated to because as soon as they come up with a new product, their competitors will find out and copy it
High advertising expenditure: Small firms might not be able to afford the high marketing expenditure involved in strong branding
What are the advantages of competition to firms
Lower entry and exit cost
Less pressure to be innovative
Easy to find out about rival products and copy them
Little need for advertisement
What are the disadvantages of competition to firms
Firms are price takers, because their products are very similar or identical to their rivals
What are the advantages of competition to consumers
Low prices
High quality
Increased choice
What are the disadvantages of competition to consumers
Due to the large number of firms, some of them don’t survive and close down, so customers have to find new suppliers
Firm are not motivated to innovate because rivals are going to copy them, so product development is slow
What are the advantages of competition to the government & economy
Increased employment
Increased efficiency due to competition
What are the disadvantages of competition to the government & economy
Resources may be wasted because if small firms close down, their workers may find it difficult to get a new job. This is a waste of labour
Define a monopoly
A monopoly is a firm that is the only supplier of a particular good or service
What are the characteristics of a monopoly
No competition: In monopolies there is only one supplier, so there is no competition from other firms
High profits: Due to lack of competition, firms get high profits as everyone buys from them
Price makers: Monopolies can dictate the prices of their goods by methods like supplying less
Non-homogeneous products: Monopolies produce different varieties of their product, making it difficult for other firms to copy them
Barriers to entry: Monopolies can prevent other firms from entering the market and taking advantage of their abnormal profits
Which are the structural barriers to enter a monopolistic market
Control of sources of raw materials: Monopolies often own most of the supply of raw material, making it difficult for new firms to enter
Economies of scale: Monopolies that produce a lot of goods are able to benefit from economies of scale by reducing their average costs. This allows them to charge lower prices, preventing other firms form entering the market
High start up costs: Some industries need expensive equipment and thus not every firm can afford to start up in such industries
Legal barriers: Certain laws can be passed to make it illegal for firms to enter a market
Which are the strategic barriers to enter a market
Restrictions on supply: Monopoly firms can threaten their suppliers that they will stop buying from them if they supply any new firms
Predatory pricing: Large firms can cut their prices in the short-run to force existing firms out of the market
Limit pricing: Large firms can cut the price below the costs of the new entrants to prevent them from entering
Exclusive dealing: Monopolies can refuse to sell to shops that stock other firm’s brands of a similar product
What are the advantages of a monopoly
Economies of scale: Monopolies are able to grow in size and output, thus reducing their average costs and allowing them to make more profits and charge lower prices (firms, consumers)
Natural monopolies: The cost of having one firm supply the whole market is lower than having many individual firms supply it, as less electricity is transmitted and less water is wasted (economy)
Research and development: Large monopolies have a lot of profits that they can use on research and development. This allows them to come up with new innovative products that benefit the consumers and help them make abnormal profits (firms, consumers)
Lower prices: Monopolies can reduce their average costs with economies of scale, allowing them to charge lower prices and still get high profits (consumers, firms)
Ability to compete in global markets: Monopolies are big enough to compete with huge overseas firms and expand further (firms)
What are the disadvantages of monopolies
Poor levels of service: Due to lack of competition, monopolies are not motivated to provide high quality services, as there are no alternatives and people will keep buying their product anyway. Thus, they do not develop new ideas and produce the bare minimum
Low output and high prices: Monopolies may limit their supply on purpose in order to force the market price of their products up. This is because consumers don’t have alternatives and will keep on buying the good anyway
Limited choice: In a monopoly, there is only one supplier. Therefore, consumers don’t have a lot of choices
Producer sovereignty: In monopolies, producers have the most power and can do whatever they want in the market
What is an oligopoly
An oligopoly is a market structure where there is a small number of firms that dominate the industry and where each firm is interdependent with other firms
What are the characteristics of an oligopoly
Few large firms dominate the market
Firms must be interdependent: The action of one large firm will directly affect another large firm. This is because one firm can only sell more by taking away sales from another
Barriers to entry exist: Barriers to entry are those that prevent other firms from entering the industry
Cartels exist: The few large firms might illegally agree to restrict output leading to a rise in price so they an make more profit
Non-price competition: Competition occurs through creating a want for a product, such as by advertising or by research and development to come up with new ideas
Price rigidity: Prices hardly vary as firms are too scared of entering a price war
What is price competition
Price competition is competition through reducing prices below those of competitors
What is non-price competition
Competition by creating a want for a product through methods like advertisement
Define innovation
The commercial exploitation of a new invention
What is a cartel
A cartel is an organization of producers which exists to further the interests of its members, often by restricting output through the imposition of quotas leading to a rise in price
What are the advantages of an oligopoly
Non-price competition: Because of non-price competition, producers need to compete in other ways such as through advertising or by developing new products. This consequently leads to a greater choice for consumers as they learn about existing products, while many more new ones are coming into the market
Economies of scale: Large firms are able to use economies of scale in order to reduce their average costs due to the fact that they are big in size. This allows them to maximize profits
Collusion: Oligopolistic firms might make agreements to restrict competition and maximize their benefit. This can be done by sharing the market geographically, agreeing to charge the same price or even by restricting output
Price rigidity: Prices don’t change a lot as large firms want to avoid price wars. This makes it easier for consumers to plan their spending
What are the disadvantages of an oligopoly
Collusion: Oligopolistic firms collude to restrict competition, limit supply or even share a market geographically. This will force prices up, acting against the benefit of the consumers
Barriers to entry: Large firms prevent other firms from entering the industry. This limits choice and competition in a market, resulting in higher prices
Less choice for consumers: The number of firms in the market is small and consumer thus do not have a lot of choices
Give examples of each market structure
Competitive markets: Fruit and vegetable market, Stock market
Oligopoly: Motor vehicles, banks
Monopoly: Royal Mail, CYTA
What does competition policy aim to do
Competition policy aims:
To protect consumer interests against restrictive trade practices such as collusion, price fixing and predatory pricing.
To limit monopoly power. This happens by preventing them to engage in restrictive trade practices or even forcing them to sell some of their business to break down monopoly power
To control mergers and takeovers
To promote competition by encouraging the creation of a thriving small business sector. This can be done through loans, advice or subsidies
What does the Competition and Markets Authority (CMA) do
The role of the CMA is to investigate any firm suspected of engaging in restrictive trade practices which prevent competition. They also investigate mergers to establish whether they go against public interest
What does the Department for Business, Innovation and Skills (the BIS) do
The BIS is responsible for providing support to small businesses and start-ups. They do that through giving advice, loans, grants and tax breaks
