Business Competition

Question 1

How market structures relate to the characteristics of a market?

Answer 1

Market structures refer to the characteristics of a market in which firms operate.

Question 2

What is a perfectly competition market?

Answer 2

A perfectly competition market is one where each firm is such a small part of the total industry in which it operates that it cannot significantly affect the price of the product in question.

Question 3

What are price takers?

Answer 3

Firms in perfect competition are price takers. In other words they accept the market price.

Question 4

What is economic definition of a monopoly?

Answer 4

The economic definition of a monopoly is a single supplier that constitutes the entire industry.

Question 5

What is the UK government definition of a monopoly?

Answer 5

Is a firm which has more than 25% of the market share in an industry, e.g. “Tesco”, “Amazon” and “Vodafone”.

Question 6

What is CMA?

Answer 6

CMA (investigate possible monopolies) = competition + market authority

Question 7

Examples of current monopolies:

Answer 7

Railways, Microsoft, Luxottica, AB InBev, Google, AT&T, Facebook.

Question 8

Price marker:

Answer 8

Price marker = customers have no choice but to accept the price charged by the business as there is no alternative.

Question 9

What are barriers to entry?

Answer 9

Monopolies exist because it is difficult for other firms to enter the industry. We call these barriers to entry.

Question 10

What barriers to entry might we face if we want to start our own airline?

Answer 10

Legal barriers - Licenses. Or for instance post office, gas/water/electricity suppliers regulated by the government. Patents - an exclusive right which means nobody can copy your process, e.g. KFC recipe.
Marketing budgets.

Question 11

What effect does monopoly have on consumer prices, choice and quality?

Answer 11

In theory, monopolies restrict output and raise the price and as they are the sole supplier have no incentive to produce quality products.

Question 12

What are the advantages and disadvantages of allow pharmaceutical patents?

Answer 12

Patents allow a firm to protect its new medicine and re-coup the cost of research and development ( R&D ) through earning high profits. The creation of new medicines increases consumer welfare.

Question 13

Can there be a cost advantage to allowing a large firm to supply a market?

Answer 13

A monopoly is not necessary efficient with its costs. However, large firms can deliver lower AC than perfect competition due to various economies of scale, e.g. technical economies in car production and purchasing economies in food retail. Lower costs=lower prices=increased consumer welfare

Question 14

Why is it best for consumers if we have one Suzhou water distribution?

Answer 14

Water is an example of a natural monopoly. Due to the large start up costs (e.g.
infrastructure) this industry can only
really support one firm in the market.
If the industry had more than one firm
– neither firm could fully benefit from
economies of scale.

Question 15

What is an oligopoly?

Answer 15

Oligopoly is an industry or market that is dominated by a few firms. The industry way consist of thousands of firms but only a few dominated it.

Question 16

Features of an oligopoly:

Answer 16

Barriers to entry
Large firms dominate
Few firms
Collusion
Non-price competition
Price competition
Different products

Question 17

What is a collusion?

Answer 17

Collusion is an agreement between two or more parties - usually illegal - to limit competition by deceiving, misleading, or defrauding others usually to gain an unfair market advantage.
E.g. set prices the same
Collusion is easier in oligopoly markets due the small number of firms.

Question 18

Price competition:

Answer 18

Lower your price to attract more customers 😁
However, profits might be low, and customers perceive your products as low quality and be put off buying it ☹️

Question 19

What is a non-price competition?

Answer 19

Non-price competition is the competition where not compete price, e.g. quality and advertising

Question 20

Oligopoly = advantages and disadvantages:

Answer 20

Advantages:
Product choice and quality
Price stability
Innovation
Disadvantages:
Barriers to entry
Collusion
Price wars

Question 21

Advantages and disadvantages of competition to firms, consumers and the economy:

Answer 21

Advantages of competition:
More choice
Lower prices
Efficiency ( less wastage )
Disadvantages:
More competition
Lower profits
Use of resources

Question 22

What is the sole trader?

Answer 22

This business is owned by just one person.

Question 23

Benefits and drawbacks of a sole trader:

Answer 23

Benefits:
Can be managed and controlled by the owner
Able to adapt quickly to meet changing customer needs
Drawbacks:
Stressful and might not be skilled enough
Products might not be diverse enough
Might not want to expand

Question 24

Benefits and drawbacks of big businesses ( LTD and PLC ):

Answer 24

Benefits:
Can employ specialist staff
Economies of scale
Access to sources of finances ( shares )
Drawbacks:
Difficult to manage if too big
Diseconomies of scale
Slower decision making

Question 25

Factors influencing the growth of firms:

Answer 25

• Government regulation → laws and licenses to trade • E.g. pharmaceutical drugs • Access to finance • Bigger firms have more access (shares and venture capitalist) smaller firms are limited to friends, family and banks • Economies of scale – help businesses grow • The desire to spread risk • Business don’t want to rely on just one product in case it fails, so they spread the risk by creating other products, which grows the firm e.g. diet coke was made in retaliation to a competitor and the rising concerns about sugar • The desire to take over competitors (grow)

Question 26

Reasons to stay as a small firm:

Answer 26

• Size of the market – it may just be small • Nature of the market – niche • Lack of finance – can’t raise more to expand • Aims of the entrepreneur • Social objectives (charity) • Personal satisfaction • Freedom • Profit satisficing – making just enough to live off and be happy.

Question 27

Definition of mass markets:

Answer 27

Mass market – this is the market that is aimed at the general population e.g. regular toothpaste.

Question 28

Definition of niche market:

Answer 28

Niche market – this is a subset of the main market and addresses a specialist need e.g. Sensodyne toothpaste for sensitive teeth.

Question 29

Additional information about mass markets and niche markets:

Answer 29

Markets often contain both mass market producers and niche producers. For example the car market contains mass market manufacturers such as Ford, Toyota and Volkswagen as well as niche manufacturers such as Ferrari, McClaren and Rolls-Royce.

Question 30

Mass market characteristics:

Answer 30

A product is sold to all consumers in the same way. For example coca cola – one advert for everyone.

Question 31

Mass market pros and cons:

Answer 31

• Pros ❖Marketing is straightforward as everyone is equally targeted ❖Large volume of sales means high revenues Cons: ❖Lots of competition ❖Being price competitive can lower profit margins ❖Products need to be marketed very well which can be expensive

Question 32

Niche market characteristics:

Answer 32

This is a subset of the main market and caters to a particular segment of the market e.g. Rolex.

Question 33

Niche market pros and cons:

Answer 33

• Pros ❖Charge premium price ❖Easier to target customers – meet their needs, increased loyalty and repeat customers ❖Less competition than in the mass markets • Cons ❖Very risky as demand (economic downturn, fashion) may not be constant.