Competition Flashcards
What is a monopoly?
A market with one dominant seller (more than 25% of market)
What are 3 features of a monopoly?
- High barriers to entry
- Unique product
- ‘Price Makers’ - control over price
- Economies of Scale
What are barriers to entry?
Obstacles that can stop new competitors entering a market
Name 5 barriers to entry?
- Cost barriers
- Legal barriers
- Economies of scale
- Marketing barriers
- Predatory pricing
What is a cost barrier?
A large amount of investment would be required by a new competitor to start up
What is a legal barrier?
Competition can be excluded by patents (licence that prevents firms copying the product)
What is economies of scale (barrier to entry)?
Established firms benefit from economies of scale (lower average costs) due to their size
What is a marketing barrier?
Big brand names (e.g. Nike) are hard to compete with
What is predatory pricing?
Big firms may lower prices to make it hard for new firms to compete
What are 4 advantages of a monopoly?
- More Research & Development
- Natural Monopolies
- Internationally Competitive
- Lower Costs
What are 4 disadvantages of monopolies?
- Less Innovation
- Higher Prices
- Inefficiency
- Less Choice
What is a natural monopoly?
Only one firm that serves the entire market at a low cost, regulated by the government
What is an oligopoly?
A market dominated by a few large firms
What are 4 features of a oligopoly?
- Economies of scale
- Barriers to entry
- Interdependence
- Non-price competition
- Collusion
- Price rigidity
What is non-price competition?
To avoid price wars, firms compete by investing in advertising and promotion
What is a price war?
When one competitor lowers prices to gain market share, so all competitors follow so they don’t lose sales
What is collusion?
Informal agreement between firms to restrict competition
What is a cartel?
Group of firms join together formally to fix prices or output in market
What is price fixing?
Where all firms agree to charge a certain (higher) price
How can we measure the size of a firm (name 4 and define each)?
Turnover - Amount of money a business makes
Number of Employees - Amount people who work for a business
Capital Employed - How much money is invested into the business
Size of Market Share - Percentage/amount of customers a
business sells their products to
How many people are employed in a small firm?
0-49
How many people are employed in a medium-sized firm?
50-249
How many people are employed in a large firm?
250+
Name and explain 3 advantages of a small firm
Better customer service - More face to face interaction with
customers and employees
Lower labour costs - Most workers are not apart of trade unions
Flexibility - Adapt more easily to change
More innovate - Lack of resources/finance means they have to be innovate
Better communication - Fewer employees, decisions can be made quicker
More motivated staff - More interaction between
employer and employee
Name and explain 3 disadvantages of a small firm
No economies of scale - higher costs
High risk (vulnerability) - More difficult to survive, compete against larger firms
Lack of finance - Struggle to raise finance because lenders consider small firms too risky
Recruitment Problems - Lack resources, cannot afford wages or training that high-quality employees require/attracted to
Name and explain 3 disadvantages of a large firm
Too bureaucratic - Are overwhelmed by their administration system (e.g. decision-making slow because many different people have to be consulted before a decision can be made)
Difficult to co-ordination and control - Running a firm around the world can be demanding (e.g. many employees = more supervision, raising the costs)
Poor motivation - Too large firm that effort made by single employee seems insignificant & personal contact may be lacking
Name and explain 3 advantages of a large firm
Economies of scale - Their average costs will be lower as their output is huge (e.g. can get cheaper supplies of materials as they buy in bulk)
Market domination - Have higher profile in the public eye (e.g. can charge high prices = higher profits)
Large scale contracts - Can be won by large firms because small firms do not have the resources to carry out the work
Why do firms want to grow? Name 3 reasons
Economies of scale Increase profits To survive Reduce risk Increase share market
What are the two methods of growth?
Organic growth
External growth
What is organic growth?
- Growing internally
- Business increases its output and sells more (may open more stores)
- Slow method of growth
What is external growth?
- Joining with another company to grow
- Faster way of achieving growth
- E.g. Merger, takeover, acquisition
What is the definition and example of a merger?
It is where two firms agree to join together as one e.g. Disney and Pixar
What is the definition and example of a takeover (acquisition)?
It is when one company buys the control of another firm e.g. Facebook took over Whatsapp
What is the difference between a friendly takeover and a hostile takeover?
Friendly takeover - When a firm welcomes a takeover bid
Hostile takeover - When one firm takes another firm against its will
Name 4 types of integration
Horizontal integration
Vertical integration
Lateral Integration
Conglomerate/diversifying mergers
What is horizontal integration?
When 2 firms in exactly same industry and production join together
What is vertical integration? Explain forward & backward vertical integration as well.
Involves a firm joining with one that operates in a different stage of production
Forward vertical integration - Next production stage
Backward vertical integration - Previous production stage
What is lateral integration?
When firms joining together that produce related products but not in competition with each other
What are conglomerate/diversifying mergers?
When firms operating in completely different industries join together
Name and explain 3 obstacles/limitations a business might face when trying to grow
Limited market - Some markets are small = large firms cannot exist
Lack of finance - If owners do not have enough finance, they will not have the ability to grow
Entrepreneurs goals - Sometimes a firm may not want to grow because owner is content with a small firm
High level of competition - Firms may find it hard to grow because of high levels of competition
Diseconomies of scale - If a firm’s average costs start to increase they may find it hard to grow
What is competition?
Rivalry between firms trying to sell goods in a market
Name 3 types of competition
- Competitive Market
- Oligopoly
- Monopoly
What are the features of a competitive market? (name 4)
- Large numbers of buyers and sellers
- Low barriers to entry
- Many close substitutes
- ‘Price Takers’
- Low market share
- Free flow of information
To survive in a competitive market, what must a firm do? (name 3 things)
- Minimise their costs by operating efficiently
- Provide good quality products
- Innovate by constantly reviewing and improving products
What is an advantage for firms being in a competitive market?
Will be efficient and have greater ability to compete in overseas markets
What is a disadvantage for firms being in a competitive market?
Profit is limited - total profit in the industry has to be shared between many firms
Name 3 advantages of competitive markets for consumers
- More Choice
- Lower Prices
- Better Quality
Explain why there is more choice in a competitive market
The high number of firms are pressed to innovate and make their products different
Explain why there are lower prices in a competitive market
Goods are close substitutes, therefore consumers can easily switch to a cheaper rival
Explain why there is better quality in a competitive market
Poor quality goods will not be bought by consumers - they will switch to rival goods
Name 2 disadvantages of competitive markets for consumers
- Uncertainty
2. Less Innovation
Explain why there is uncertainty in a competitive market
Frequent entry and exit of firms may disrupt the market and cause confusion
Explain why there is less innovation in a competitive market
Lower profit levels leave fewer resources available for Research and Development and innovation
Name 2 advantages of competitive markets for the economy
- Resources are allocated more effectively
2. More innovation
Explain why resources would be allocated more effectively in a competitive market
Because firms have to operate efficiently to survive (are under pressure to minimise costs)
Explain why there would be more innovation in a competitive market
Due to competitive pressure on firms
What is a disadvantage of competitive markets for the economy?
Resources might be wasted because some production factors are immobile
Explain how some production factors are immobile in competitive markets and what this can lead to?
When firms close down it takes time for resources to transfer to other uses = can be wasteful
What is a pure monopoly?
A market controlled by one seller with a good or service that has no close substitutes
Explain why monopolies can research and develop more and why is this good
With their higher profit levels, monopolies have the resources to invest in R & D and generate new products for consumers
What is advantage of natural monopolies?
In some markets (e.g. air travel and water distribution), it’s cost-effective to have one supplier → wasteful duplication is avoided
What is the advantage of monopolies being internationally competitive?
Successful monopolies can compete more easily overseas = create jobs and exports in the producing country
How can monopolies lower their costs and why is this beneficial?
Large monopolies can exploit economies of scale = reduces costs and might mean lower prices for consumers
Why is there less incentive to innovate in monopolies?
There’s no competitive pressure
Why is there higher prices in monopolies?
Without competition consumers are forced to pay higher prices
Why is there inefficiency in monopolies?
There’s no pressure to minimise costs
Why is there less choice in monopolies?
No competition
What is meant by interdependence?
The actions of one firm will have an impact on the others in the market
What is price rigidity?
Prices stay the same for lengthy periods because firms fear price wars
Why are there barriers to entry in oligopolies?
Set-up costs may be high and the dominant firms discourage entry by investing heavily in marketing
What are 3 advantages of oligopolies?
- Choice
- Price Stability
- Economies of Scale
Why is there a lot choice in oligopolies? (2 reasons)
- Non-price competition can result in more choice for consumers, as firms continually launch new brands
- Choice is also provided by small produces that supply niche markets
What is the benefit of price stability?
Stable prices will create some certainty in the market
How may consumers benefit from price wars?
Prices may be cut aggressively
What is the benefit of economies of scale (for consumers)?
Costs will be lower which might mean lower prices for consumers
What are 3 disadvantages of oligopolies?
- Cartel
- Collusion
- Dominant firms spend huge amounts on advertising and promotion
Why is a cartel bad?
If successful, they act as monopoly in the market
Why is collusion bad?
If firms fix prices, consumers will pay more + if the market is shared out there’ll be less choice
Dominant firms spend huge amounts on advertising and promotion, why might this be a bad thing (for consumers)?
Many consumers might prefer to have lower prices with less spent on advertising
How can growth help a firm to survive?
Large firms can deal better with competition and poor trading conditions because they have more resources
How can growth help a firm reduce risk?
Branching out into new markets and new products means that if one product fails, success in others can keep the firm going
What is the benefit of a larger market share?
With a larger market share, firms can charge more, enjoy a higher profile and establish its brand more effectively
How can growth help a firm to increase profit?
Large firms generate more revenue and profit because they have big market shares and more products in more markets
What is the benefit of economies of scale? (growth)
Lower average costs + improves efficiency and profitability
