impact of competitive market structure buss4 - competitive
TRANSCRIPT
Impact of Competitive Market Structure
BUSS4 - Competitive
What is a competitive market? A competitive market could be described as
one where there is intense rivalry between producers of a similar good or service
The number of firms operating within the firm influences the intensity of competition
The size of the firms within the market needs to be taken into account: if one firm has 60% and the other 40% is shared by the others the market may not be very competitive
Similarly if a market comprises of 4 firms with similar market share the market will be fairly competitive
Consumers enjoy lower prices and better quality when markets are competitive
Firms find their profit margins squeezed Firms operating in competitive markets try hard
to minimise the competition by creating a USP or stopping new entrants with predatory pricing
The degree of competition within a market Monopoly Some markets are dominated by one
firm The legal definition of a monopoly in
the UK is a firm that has a market share of 25% or above
Monopolies are argued to be bad for consumers because they can set high prices and restrict choice however they are able to invest profits into research and development and create new innovative products
In markets dominated by a single large business firms do not need to spend heavily on promotion; they will focus on investing in their product
Apple (the market leader in MP3s) will spend millions on R&D
The degree of competition within a market Oligopoly An oligopoly is a market that is dominated by
a handful of large companies There may be lots of other small companies
but they have very little market share between them
The supermarket industry in the UK is a good example of this
The rivalry between these firms is very intense They are all very interdependent – their
actions will have an affect on the others Although supermarkets focus a lot of attention
on prices, firms in these markets tend to focus on non-price competition
If they reduce their price others will do the same, customers will stay where they are and they will all lose revenue
If one firm puts up their price then customers will move to a competitor
Either way the firm loses out so, in theory, they will tend to do nothing.
The degree of competition within a market A fiercely competitive market Tends to be made up of
hundreds of relatively small firms
They are likely to have near identical products like commodities
Rivalry will be intense Price is likely to be most
important Production costs will need to be
managed carefully Without price cuts market share
is likely to be lost Competition in the Indian
restaurant industry is extremely fierce
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Responses of businesses to a changing competitive environment If a market becomes more competitive there
are many ways in which firms can react Price cutting
Price cutting may fight of a competitor but it may need cost reduction to preserve profit margins
If margins are already low it may not be possible
Increase product differentiation This can avoid cutting prices
Changing a design Strengthening the brand image Redesign with unique features Improving quality
Find new markets If a business is struggling in one market it
may look for another (Tesco opening superstores in Eastern Europe)
Responses of businesses to a changing competitive environment Takeover
Try to takeover the successful competitor Cadbury purchased Green & Black Google purchased Youtube Government is supposed to stop takeovers that crush competition but their
record of doing so is not good Predatory pricing
A firm cuts its pricing to undercut the rival This is normally done by dominant firm to force the smaller firm to close down It is illegal but still common because the fines do not outweigh the benefits of
doing it
EvaluationThe best way a business
can ensure its survival in a competitive world is to find something it is good at and stick to it
The problem is that business leaders often make decisions based on ego rather than logicShould Tesco have moved
into the US with fresh&easy or tried to get into China?