The Market

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The Market competition

• AS BS external influences

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Aims

• To understand different market types
• To understand the implications of being in the
  extreme business markets (competitive/monopoly)
• To be aware of barriers to entry
• To be able to identify issues of unfair
  competition and implications on stakeholders.

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What is a competition?
A game of rounders?
A race?
A football match
An arts contest?
A pub quiz
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Whats the aim of competition?

• Competition is when people try their best to do
  something better than other people so they can
  win.
• So how do businesses compete and win?

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Name me some competitors of these businesses?
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What is competition in the marketplace?

• Competition among buyers can happen when there is
  more than one business selling the same or
  similar item.
• They are competing for customers.
• Competition can also happen when there is one
  business, but many customers competing to get
  limited goods.

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How Do Businesses Compete?
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Examples of how businesses compete
What are the benefits and limitations of using
each of these strategies?

• Lower prices
• Better products
• Better customer service
• Incentives freebies, coupons, sales, and special
  deals
• Advertise to say how wonderful their products
  are.

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How Does Competition Affect the Customer?

• Customers are usually better off when there is
  competition.
• After all, businesses are trying to get them to
  choose their products.
• With competition, customers get to choose how to
  spend their money.
• They can look at prices, product quality,
  customer service, and other incentives before
  they buy anything.

• However, in some cases, with too much
  competition, maybe companies will only compete by
  lowering prices and end up lowering them so much
  that they go out of business or can only offer
  products of lower quality.
• This would not be good for the consumer.
• It would end up giving customers fewer choices
  when spending their money.

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Market Structure

• You need to know the different market types..

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Market Structure

• Market structure identifies how a market is
  made up in terms of
• The number of firms in the industry
• The nature of the product produced
• The degree of power each firm has
• The degree to which the firm can influence price
• Profit levels
• Firms behaviour pricing strategies, non-price
  competition, output levels
• The extent of barriers to entry
• The impact on efficiency

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Market Structure
Perfect Competition
Pure Monopoly
More competitive (lots of small
businesses) Customers have lots of choice
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Market Structure
Perfect Competition
Pure Monopoly
Less competitive (fewer businesses) Consumers
have less businesses to choose from
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Market Structure
There are specific for each market type
Pure Monopoly
Perfect Competition
Monopolistic Competition
Oligopoly
Duopoly
Monopoly
The further right on the scale, the greater the
degree of monopoly power exercised by the firm.
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Market Structure key things to think about

• Importance
• Degree of competition affects the consumer will
  it benefit the consumer or not?
• Impacts on the performance and behaviour of the
  company/companies involved

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Perfect Competition Basic assumptions
No business has a significant market share
there is no clear leader / winner!

• Many small firms, each of whom produces an
  insignificant percentage of total market output
  and thus exercises no control over the ruling
  market price.
• Many individual buyers, none of whom has any
  control over the market price i.e. there is no
  monopsony power
• Perfect freedom of entry and exit from the
  industry. Firms face no sunk costs - entry and
  exit from the market is feasible in the long run.
  This assumption ensures all firms make normal
  profits in the long run
• Homogeneous products are supplied to the markets
  that are perfect substitutes. This leads to each
  firms being passive price takers and facing a
  perfectly elastic demand curve for their product
• Perfect knowledge consumers have readily
  available information about prices and products
  from competing suppliers and can access this at
  zero cost in other words, there are few
  transactions costs involved in searching for the
  required information about prices
• No externalities arising from production and/or
  consumption which lie outside the market

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Many small firms

• each of whom produces an insignificant
  percentage of total market output and thus
  exercises no control over the ruling market
  price.

Price takers so small and so many individual
firms cannot influence price!
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Homogenous goods or services

• The products are perceived to be identical
• There are many perfect substitutes.
• This leads to each firms being passive price
  takers
• Faces a perfectly elastic demand curve for their
  product

Homogenous does NOT mean twins!!!
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Are there homogenous goods for the food industry
or are they differentiated?
Does Mobeen produce homogenous or differentiated
goods?
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Perfect Information

• Consumers have readily available information
  about prices and products from competing
  suppliers
• And can access this at zero cost
• There are few transactions costs involved in
  searching for the required information about
  prices

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Freedom of entry and exit

• Firms face no sunk costs - entry and exit from
  the market is feasible in the long run.
• If firms are making excessive profits, new firms
  could easily enter the market.
• This assumption ensures all firms make normal
  profits in the long run

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Freedom of entry exit no barriers to entry

• Are the start up costs to running a restaurant
  cheap or expensive?
• What start up costs are there?
• Are these sunk costs?

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Monopolies?
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Monopoly basic issues

• Pure monopoly where only one producer exists in
  the industry
• In reality, rarely exists always some form of
  substitute available!
• Monopoly exists therefore where one firm
  dominates the market
• Firms may be investigated for examples of
  monopoly power when market share exceeds 25
• Use term monopoly power with care!

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Monopoly power!

• Monopoly power refers to cases where firms
  influence the market in some way through their
  behaviour determined by the degree of
  concentration in the industry
• Influencing prices
• Influencing output
• Erecting barriers to entry
• Pricing strategies to prevent or stifle
  competition
• May not pursue profit maximisation encourages
  unwanted entrants to the market
• Sometimes seen as a case of market failure

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Monopoly

• Problems with models a reminder
• Monopolies not always bad may be desirable in
  some cases but may need strong regulation
• Monopolies do not have to be big could exist
  locally

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What is an Oligopoly?
Key issue is behaviour of a few!

• Oligopoly is best defined by the market conduct
  (behaviour) of firms
• A market dominated by a few large firms I.e.
  Competition amongst the few
• High level of market concentration
• Concentration ratio is the market share of the
  leading firms
• Each firm tends to produce branded /
  differentiated products

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What is an Oligopoly?

• Entry barriers long run supernormal profits
• Mutual interdependence between competing firms
  (important)
• Intensive non-price competition is common
• Periodic aggressive price wars
• Strong tendency for many market structures to
  tend towards oligopoly in the long run
• Market consolidation
• Exploitation of economies of scale

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Examples of Oligopolies
Take any one of these business areas and see if
you can name the top 5 companies!

• Petrol Retailing
• National Food Retailers
• Hotel Industry
• DIY Retail Sector
• Electrical Retailing
• Package Holiday Companies
• Leading Commercial Banks
• Telecommunications Industry
• Pharmaceutical companies
• Soft drinks manufacturers
• Low cost airlines
• Computer games console manufacturers

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Concentration ratio

• Is key to deciding what type of market structure
  that a business has
• Is it perfectly competitive, monopolistic,
  oligopoly, duopoly or monopoly?

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Concentration ratio market share look at the
top 4 businesses

• Perfect competition, with a very low
  concentration ratio. (no clear winners!)
• Monopolistic competition, below 40 with a
  four-firm measurement.
• Oligopoly, above 40 with a four-firm
  measurement.
• Monopoly, with a near-100 four-firm measurement.

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Guess the type of market for the following
industry
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Market Share in Food Retailing
Whats the concentration ratio of top 4?
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The Concentration Ratio in Hotels
4 firm concentration ratio 59.77
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The Concentration Ratio in clothing market
Whats the concentration ratio of top 4?
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Perfect competition? Monopolisitic? Oligopoly? Duo
poly? Monopoly?
Market Structure
Characteristics Look at these everyday products
what type of market structure are the producers
of these products operating in?
Remember to think about the nature of the
product, entry and exit, behaviour of the firms,
number and size of the firms in the industry. You
might even have to ask what the industry is??
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So back to key BS theory

• All businesses will face some type of
  competition. The amount and type of competition
  depends on the market the business operates in
• Many small rival businesses e.g. a shopping
  mall or city centre arcade close rivalry.
• A few large rival firms e.g. washing powder or
  Coke and Pepsi.
• A rapidly changing market e.g. where the
  technology is being developed very quickly the
  mobile phone market.

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Case study issues
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The market and competition- case study
questions..!

• What evidence is there that Mobeen is operating
  in an oligopolistic market structure and
  monopolistic competition?
• Identify two barriers to entry in the fast food
  market.

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What is the difference between excess capacity
and capacity shortage in the fast food market?
Which do you think Mobeen face?
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More issues

• What is meant by the degree of competition and
  what effects might it have on Mobeen?
• Look at the 4 Ps in your answer