Competition

Question 1

define competition

Answer 1

where two or more sellers of similar goods act independently to persuade buyers to choose their products

Question 2

define competitive environment

Answer 2

how fiercely other businesses compete with the products that another business makes

Question 3

give the order of market structures in decreasing order of their competition

Answer 3

monopoly
oligopoly
monopolistic competition
perfect competition

Question 4

give 5 factors that affect the nature and intensity of competition

Answer 4

ease with which firms can set up and compete

number of firms operating

extent to which rival firms offer differentiated products

amount of control businesses exert within their market

extent to which an individual business can determine the price of their products

Question 5

what does it mean by barriers to entry? give 6 points

Answer 5

high capital/investment requirements to set up

strong brand identity of existing firm’s products

economies of scale - these reduce average costs of production making it difficult for new entrants to compete

access to factors of production eg raw materials, land, skilled staff

access to distribution networks eg how easy it is to get products into shops

behaviour of existing firms eg retaliation through short term pricing strategies

Question 6

define and describe perfect competition

Answer 6

where large numbers of businesses competing each produce a low percentage of total market output and cannot influence the prevailing market price

no one business is large enough to prevail over others and influence the activities of others

perfect competition is the model that all other market structures are compared against

Question 7

what are 5 characteristics of perfect competition and expand them

Answer 7

infinite number of individual buyers

products in the market can be easily substituted - no branding, no product differentiation, no way of telling products apart

no market leaders and no price leaders - each business must accept the going price on the marketplace so they are price takers

perfect knowledge - consumers have readily available information about prices and goods from competing suppliers and can access this at zero cost
so there are few transaction costs involved in searching for the required information about prices
likewise, sellers have perfect knowledge of their competitors

businesses are free to leave and enter the market at any time - there are no barriers to entry to exit

Question 8

why is perfect competition unlikely to exist in most real-world markets?

Answer 8

perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist

in reality there is some sort of branding or differentiation whether it is the price/quality/location

Question 9

why are most markets imperfectly competitive?

Answer 9

consumers nearly always have imperfect information and their preferences and choices can be influenced by the effects of persuasive marketing and advertising

Question 10

what is a monopoly?

Answer 10

where there is only one dominant business or a single producer within a market

Question 11

what is a pure monopoly?

Answer 11

where one business has 100% of the marketplace

this is very rare therefore a legal monopoly exists where one business has over 25% of the market share

Question 12

why were pure monopolies not uncommon years ago?

Answer 12

average household only had one option of gas supplier, home telephone supplier, electricity supplier etc.

Question 13

how did competition be introduced to pure monopolies?

Answer 13

through deregulation and privatisation

Question 14

give 4 characteristics of a monopoly and explain them

Answer 14

price maker -
the business has control over what price they set
no close substitutes so a higher price can be charged without fear of consumer switching to another product

barriers to entry -
difficult/impossible for new competitors to enter the market
resource barrier to entry is when a monopolist business can buy the key resources needed to produce/provide the good

unfair competition -
a monopolist may defend their position through unfair competition
eg they may apply predatory pricing when a new competitor attempts to enter the market

heavily regulated -
through the CMA to protect consumers from unfair competition

Question 15

give 2 benefits and drawbacks of monopoly to businesses and consumers

Answer 15

+
likely to benefit from supernormal profits and possess specialist expertise

may decide to invest profits in research and development which may benefit the consumer

profits earned can be used for investment into improving products, production technologies, faster rate of technological development and developing new products

-
businesses may become complacent and inefficient due to the lack of competitive pressure

+
being big means they can benefit from large economies of scale, reducing prices and making goods affordable

-
may become a price maker and charge high prices
choice restricted for consumers

Question 16

what is an oligopoly?

Answer 16

where there are many firms in a market but it is dominated by a few large competitors each of which have control over the market

Question 17

what three characteristics does an oligopoly have and explain them
give 1 extra one

Answer 17

differentiated products -
strong brand identity within oligopolies
firms try to increase their market share by creating new market strategies
brand loyalty encouraged by use of heavy advertising, promotion, loyalty schemes

stable pricing -
important to think of competitor’s reactions when increasing/decreasing prices
if price increases customers will go to competitors, if decreases competitors will retaliate by lowering their prices
as a result, prices tend to be stable and there is a lot of non-price competition through loyalty cards and promotional deals

barriers to entry -
each business controls large part of the market
can erect barriers to entry to prevent new entrants joining
barriers include high set up costs, economies of scale

extra: supernormal profits

Question 18

what does collusion mean?

Answer 18

when businesses get together to decide not to be competitive to benefit themselves

Question 19

what does cartel mean?

Answer 19

agreement on control high prices and excluding a competitor from the market/restricting competition

Question 20

what is the impact of oligopolies on business behaviour? give 3

Answer 20

intense competition but businesses engage in non-price competition and they will feel as though they should retaliate of competitors launch a new campaign etc.

oligopolies may engage in collusion/price fixing and when businesses in an oligopolistic market act together, a cartel is formed which is illegal

oligopolies are advantageous to consumers since a large size business leads to economies of scale and high profits mean there is more money for investment and innovation. also, oligopolies target a wide range of market segments providing variety and choice

Question 21

what is monopolistic competition?

Answer 21

where a large number of small businesses compete with one another

firms offer similar products but not exact substitutes
eg hairdressers and takeaways

in every monopolistic market sector, each business tries to offer something different and possess an element of uniqueness but are essentially competing for the same customers

Question 22

give 3 characteristics of monopolistic competition and explain them

Answer 22

businesses have some control over price -
aren’t price takers but have a limited degree of control over the prices they charge

low barriers to entry -
easy for firms to enter and leave the market
no individual organisation has control because there are many sellers

similar products, not exact substitutes -
brand identity weak
advertise a lot as products are similar
businesses attempting to sell at slightly different price levels
consumers find it difficult to decide what is a fair price and the exact differences between products

Question 23

what are 3 impacts on business behaviour from monopolistic competition?

Answer 23

differentiation may take several forms - eg businesses can use physical product differentiation where they use size, colour, shape, performance, design and features to make their products different
or they can differentiate through methods of purchase and distribution eg online purchases and free delivery

due to competitive nature, businesses are under pressure to innovate their products and offer consumers good level of service

businesses need to ensure they maintain low costs so operating efficiently is important to avoid unnecessary costs or it could lead to price increases and consumers switching

Question 24

what are the benefits of competition?

Answer 24

consumers will benefit as businesses may be more price-sensitive and more market-orientated

greater competition leads to a wider variety of choice with higher quality and lower price