Impact of Competitive Market Structure

1. Impact of Competitive Market Structure BUSS4 - Competitive

2. 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

3. 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

4. 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.

5. 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 P327

6. 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)

7. 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

8. Evaluation • The 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 logic • Should Tesco have moved into the US with fresh&easy or tried to get into China?