Decision Making in Markets Flashcards
What is a market
A market consists of all people who are interested in buying or selling a particular good or service.
Markets can be:
local,
state-wide,
national or
global
price setting mechanism (price must be right)
The market price is set by the interaction between buyers and sellers.
A transaction/exchange of goods/services will only occur if the buyer and seller can agree on a price
The price-setting mechanism refers to how the market price of good/services is determined by the market
market structure characteristics
Number of firms
Variety of goods/services
Barriers to entry
Access to information
Control over prices
no of sellers
High or low number of sellers
More sellers = higher level of competitiveness and lower Market Power
variety of goods and services
Homogenous or Differentiated goods/services
Which affects level of competition, affecting importance of branding
barriers to entry
Barriers to enter/exit the market
Which affects number of sellers/competitors
access to info
Access to Perfect information
Access to information about market
prices, trends, conditions and
product information affects quality
of decisions made by buyers
control over prices
Businesses are Price Makers or Price Takers
Where consumers can only accept the prices set; vs influence it
market pwr
Refers to the ability of any particular business to control or manipulate prices or quantities of goods/services offered in a market.
Affected by the number and quality of
sellers in a market.
Less competitors = more power
why is high market pwr bad
Businesses become price makers
(they set the price of products);
consumers would have no choice
Quality and productive efficiency suffers
as businesses have no need to improve since
again consumers have no choice
Poorer quality and efficiency reduces our
international competitiveness (ability to
compete in global markets)
All this lowers living standards
WHY LOW MARKET POWER IS GOOD
Because more competition creates:
Greater variety of goods and services
Better quality of goods and services
Lower prices for consumers
Better and more transparent
information for consumers
Faster pace of innovation
Improved living standards
PERFECT (PURE) COMPETITION
PERFECT (PURE) COMPETITION
Many sellers/firms/businesses and buyers
Goods are homogenous (no differentiation)
Competitors ease of entry into market (no barriers)
Buyers and sellers can access perfect information
Businesses are price takers (businesses are
unable to set prices)
No Market Power
Example markets: Fruit and veg, petrol
MONOPOLISTIC COMPETITION
MONOPOLISTIC COMPETITION
Many sellers/firms/businesses and buyers
NOT homogenous – products are not identical
Competitors ease of entry/exit into market
Buyers and sellers can access good-perfect information
Businesses are somewhat price takers (competing businesses are able to set
varied prices but within a limit accepted
by consumers)
Small amount of market power
Example markets: fast food, clothing
OLIGOPOLY & DUOPOLY
OLIGOPOLY & DUOPOLY
Few sellers/firms/businesses
Goods can be either homogenous (eg; oil) or differentiated (eg; phones). Brand names are extremely important to differentiate
Competitors difficult to enter market due to high costs to enter, regulations, patents/copyright issues, etc
Perfect information does not always exist because suppliers usually have more information about the market conditions and the products
Large amount of market power
Example markets: Banking, Supermarkets, computers, Fossil fuels
Note: duopoly is a type of oligopoly but with only two competing firms
which market is ideal
PURE COMPETITIVE MARKETS IS DA BEST!
PERFECT (PURE) MONOPOLY
PERFECT (PURE) MONOPOLY
One large seller/firm in the market
Differentiation is not important
Very difficult/impossible for competitors
to enter market
Price maker (able to set or influence prices/quantities)
Complete market power
‘Example’ markets (Don’t really exist anymore as they are illegal in Australia): public/state owned “natural monopolies” such as airports, postal service, utility infrastructure/distribution
STRATEGIES TO INCREASE PROFITS
STRATEGIES TO INCREASE PROFITS
Good Companies will try to:
Increase Sales
Advertising/Marketing
Multibranding
Nudging
Decrease Expenses
Productive/Allocative Efficiency
Bad Companies will try to:
Undertake Anti-competitive behaviour
INCREASE SALES: ADVERTISING/MARKETING
INCREASE SALES: ADVERTISING/MARKETING
To increase their share of the market, businesses
might undertake some of these advertising/
marketing strategies:
Advertising mediums (TV, radio etc)
Product placement in films
Positioning products in strategic locations (such as confectionary companies ensuring their products feature prominently in supermarkets)
Positioning business in strategic locations (such as McDonald’s ensuring their stores are positioned in high traffic areas)
advertising and marketing strats cont
Publicity of the product or brand, such as media reporting contributions to charitable organisations
Sponsorship of events or sporting teams
Rewards or loyalty programs
Sales and limited time discounts
Use of celebrity endorsements, Influencers and social media
INCREASE SALES: MULTIBRANDING (REVIEW)
INCREASE SALES: MULTIBRANDING (REVIEW)
Multibranding is defined as individual companies marketing their products under separate and distinct brand names.
Some Examples:
Coca-Cola producing numerous soft drink brands (including Coke, Fanta and Sprite)
Cadbury producing a
number of chocolate brands
(including Flake, Dairy Milk
and Roses)
Kellogg’s producing various
brands of cereal (including
Cornflakes, Special K and
Rice Bubbles).
WHY MULTIBRANDING? (REVIEW)
WHY MULTIBRANDING? (REVIEW)
A company may want to take on a multi-brand strategy to:
Hold more supermarket space
Use its brand reputation to boost
products made in other markets
Appeal to audiences who like novelty
or trying new things
reach a different audience
create a luxury line to appeal to a
consumer willing to pay more.
All resulting in more sales = more profits
DECREASE EXPENSES: PRODUCTIVE EFFICIENCY
DECREASE EXPENSES: PRODUCTIVE EFFICIENCY
Businesses will seek to achieve the most cost-efficient method of production. This will often include the following types of strategies:
Sourcing the highest quality
and quantity of natural
resources at the lowest cost
Investing in more efficient capital
resources technology or machinery
Investing in higher quality labour resources
(e.g. Training/reskilling employees
or employing highly skilled employees)
ANTI-COMPETITIVE BEHAVIOURS
ANTI-COMPETITIVE BEHAVIOURS
Strong competition is good for consumers, but can reduce business profits and market share
There are strategies that businesses sometimes use to win market share, some legal and some which are not.
ANTI-COMPETITIVE BEHAVIOURS, WHAT HAS BEEN TO DONE TO STOP IT
ANTI-COMPETITIVE BEHAVIOURS
Known as anti-competitive behaviour, some companies engage in it to
weaken competition
boost their market power
increase prices without consequence
Laws are usually in place to punish those who engage in it
ANTI-COMPETITIVE BEHAVIOURS (list)
ANTI-COMPETITIVE BEHAVIOURS
Price discrimination
Predatory pricing
Cartel behaviour
Price fixing
Exclusive dealing
Collusive bidding
Market zoning
PRICE DISCRIMINATION
how does it help maximise revenue
PRICE DISCRIMINATION
Price discrimination involves a business charging consumers different prices for the same product.
It enables businesses to maximise revenue by;
- imposing a higher price for ‘high value’ customers (namely those with the ability and preparedness to pay more)
- and a lower price to ‘low value’
customers (namely those unable
or unwilling to pay a higher price).
This allows more customers (because
even though they get less from the
low value customers, it is better
than nothing)
It is only illegal if it harms
competition or is misleading
or biased toward groups of
people (eg; not for equitable reasons)
PREDATORY PRICING
PREDATORY PRICING
When a dominant company deliberately sets its prices at such a low level that a competitor cannot match, with the purpose of damaging or forcing them to withdraw from the market.
Once the competitor is eliminated, the company is then able to again dominate the market, exercise a greater degree of market power and raise prices to the detriment of consumers and society.
In effect, the company is behaving like a predator, seeking out and eliminating or devouring its competitors.
In a competitive sense, this is normal profit-maximising behaviour of businesses, and would exist regularly if it were not for government intervention.
CARTEL CONDUCT (define and list types)
CARTEL CONDUCT
A cartel is defined as two or more businesses joining forces to maximise profits.
It means that they agree not to compete against each other and instead develop joint strategies to manipulate the market at the expense of consumers.
Cartel conduct includes the following types of agreements.
Price fixing
Exclusive dealing
Collusive bidding
Market zoning
CARTELS: PRICE FIXING (PRICE GOUGING)
CARTELS: PRICE FIXING (PRICE GOUGING)
Where companies collaborate instead of compete to set prices together with the purpose of controlling prices, supply and demand, often to the detriment of consumers and society.
