External influences - Market dominance

Question 1

what is market dominance?

Answer 1

a measure of the market share compared to competitors. A dominant company will have the highest market share

Question 2

what is market power?

Answer 2

the ability of a firm to influence or control the terms and conditions on which goods are bought and sold

Question 3

define merger

Answer 3

when two companies join to form a new, larger business

Question 4

define acquisition?

Answer 4

control of another company is achieved by buying a majority of shares

Question 5

benefits of external growth for the business?

Answer 5

• may gain new management w/ different skills and talents
• will result in an increase in revenue and therefore market share
• may be able to meet customer needs more effectively with a combination of resources
• may experience economies of scale

Question 6

what are the disadvantages of external growth?

(…) = stakeholder it affects

Answer 6

• may suffer from diseconomies of scale due to size (e.g. bad communication) (shareholders)
• may take on extra debt that the business could struggle to repay if the strategy isn’t successful (shareholders)
• could result in redundancies (staff)
• could result in higher prices (customers)
• could result in a dominant business dictating terms and conditions (suppliers)

Question 7

define organic growth?

Answer 7

involves expansion from within the business

Question 8

what are some examples of organic growth?

Answer 8

• opening new stores
• launching new products
• employing more workers
• investing in new technology
• launching existing products into new markets
• increasing production capacity

Question 9

what are the advantages of organic growth?

Answer 9

• less risky than acquisitions
• could be financed internally (e.g. retained profits)
• allows the business to grow at a more sensible rate in the long run

Question 10

what are the disadvantages of organic growth?

Answer 10

• growth achieved may be dependant on the growths of the overall market
• hard to build market share if one business is already a clear leader
• slow growth ☞ shareholders in the business may prefer a more rapid growth of revenues and profits

Question 11

how can mergers and acquisitions lead to dominant firms?

Answer 11

the business will gain more customers once merged, meaning they will make more sales, this means their market share will grow (it is also because the market share of the two businesses combines)

Question 12

how can organic growth lead to dominant firms?

Answer 12

as the business gains more customers by expanding stores or releasing new products, they will make more sales which means their market share will grow leading to dominant firms

Question 13

explain how market dominance is restricted and regulated in the UK

Answer 13

the Competition and Markets Authority (CMA) are a regulating body
they can stop mergers and acquisitions from going ahead if they think the business will become too dominant

Question 14

What is the CMA’s main aim?

Answer 14

their main aim is to promote (encourage) competition for the benefit of consumers, both within and outside the UK. Their aim is to make markets work well for consumers, businesses and economies

Question 15

What does the CMA do?

Answer 15

• investigate mergers and acquisitions which could restrict competition
• they investigate where there may be abuses of dominant positions
• brings criminal proceedings against individuals who commit the cartel offence

Question 16

what sanctions can the CMA apply?

Answer 16

• the businesses involved can be fined up to 10% of their global turnover
• customers and competitors of the firms involved can sue for damages as a result of being affected by the anti-competitive behaviour
• individuals can be disqualified from being company director
• the CMA can also fine individuals, e.g. a director, if that person fails to comply with the CMA’s requests for information provision during a competition act inquiry

Question 17

are there separate regulators for other companies?

Answer 17

they exist for former nationalised industries like gas, electricity, water, railways and telecoms e.g. OFWAT

Question 18

what are the impacts of regulation on businesses and its stakeholders?

Answer 18

• Encourages businesses to compete to gain customers i.e. by producing better quality products.
• more choice and better value for customers.
• more businesses operating within a given market
• better terms for suppliers
• less abuse of dominant positions i.e. refusal to supply
• lead to fines, prosecution and suspensions if not obeyed