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Topic 2.5
Competition
This topic covers competition and the different ways that producers compete. You will learn about the different types of competitive markets including monopoly and oligopoly markets, and whether competition actually benefits the common consumer.
What is Competition?
Competition is a situation in a market where multiple different firms in a market are trying to sell a similar product to the same set of consumers.
For example, Coke and Pepsi are competing.
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Price Competition
Firms lower price in order to gain consumers and thus market share as the lower prices are more appealing to consumers so they will switch over to the substitute. Any firm not doing this will lose consumers and go out of business. If a firm lowers prices to price = cost, then they won't make profit
Producers compete to:
Enter a market
Survive in a market
Make a profit
Non-Price Competition
Non-price competition is when firms try to attract customers using things other than lower prices. It is common in markets where businesses want to build loyalty and stand out from rivals. Firms use non-price competition to make their product seem more attractive without starting a price war. This can help them increase sales, protect market share, and keep customers coming back.
Marketing (for positive publicity)
Improving quality and variety of products
Innovation
Location of stores (convenience)
Becoming more efficient
Offering a specialised good or service
Types of Competitive Markets
Monopoly
A monopoly exists when a single company or entity is the sole supplier of a particular commodity or service, controlling over 25% of market share. This allows the entity to have significant control over the market price and barriers to entry for others. In such a market, consumers have no close substitutes to choose from, often leading to less innovation and higher prices than in more competitive environments. They exist due to barriers of entry: legal (e.g. royal mail), location (so even small firms can be monopolies), copyrights and efficiency
Oligopoly
An oligopoly is a market structure in which a small number of firms has the large majority of market share. An oligopoly is similar to a monopoly, except that rather than one firm, two or more firms dominate the market. In the UK, 5 firms must control over 50% of maret share for the market to be considered an oligopoly, such as with supermarkets in the UK. This structure often leads to mutual interdependence, where the actions of one firm significantly affect the others. Oligopolies are inefficient, and often try to collude,
Competitive Markets
A competitive market is one in which there are a large number of buyers and sellers, such that no single buyer or seller has a significant impact on the market price. In this environment, resources are allocated efficiently, and firms are forced to innovate and keep prices low to attract customers. Competitive markets require innovation and a good quality of goods and services so that consumers do not switch to the substitutes in the market.
SIZE OF FIRM
EFFICIENCY
MONOPOLY
Very big (only one in the market)
Not efficient, but the firms are large so they get ecoomies of scale and are hence efficient
OLIGOPOLY
Big
Not efficient
COMPETITIVE MARKET
Small
Very efficient
Collusion occurs when rival firms within an industry cooperate to their mutual benefit, such as setting the same price in the market. This usually involves agreements to limit production or manipulate prices in order to increase collective profits at the expense of consumers. In many jurisdictions including within the UK, such practices are illegal due to their anti-competitive nature. Firms might align their strategies instead of engaging in price wars, which effectively creates a monopoly-like outcome in an oligopolistic market.
How competition affects price
Competition can lower prices because more firms in the market increases supply, which pushes the market price down. It can also make firms’ individual demand curves more elastic, since consumers have more alternatives and can switch more easily. In addition, firms may cut prices to beat rivals in price.
However, competition does not always reduce prices. If firms compete through non-price methods such as advertising, better service, or product innovation, their costs may rise, and some of those costs may be passed on to consumers in higher prices. Successful innovation can also let firms charge more because the product is seen as better or different
Evaluating the impact of competition on consumers
Points
Evaluations
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More choice and less price manipulation - As producers innovate, the market offers more substitutes and a wider range of products, which improves customer choice and makes it easier for consumers to switch if prices rise. This greater competition reduces the chance of price manipulation and limits price increases, since firms are less able to act like a monopoly when demand becomes more elastic because of the extra alternatives
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Increased standard of living - There are more producers in the market, so competition increases the supply at each and every price level, so supply shifts right, causing a decrease in price, also producers decrease price in price competition in an attempt to persuade more consumers to choose their product as the cheapest
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Improved quality of goods and services - Producers may compete with means other than price in order to make profits while charging a higher price -> They will try to produce products which are better quality - this allows consumers to receive higher quality products -> increased satisfaction -> increased quality of life
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Innovations can be harmful - Producers may innovate using new technology -> Innovations may not have been tested properly -> has negative impacts on consumers. Smaller firms might end up being forced out of the market if they are less efficient or are unable to compete, so the local areas will have less character and more empty high streets. It will discourage further entry from new firms, so the market could end up becoming a monopoly in the long term.
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Costs of production might be passed on to the consumers e.g. money spent on marketing, leading to higher prices + cutting corners which could lead to lower standard of living
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Cutting corners - Producers try to lower prices to make a profit/stay in the market -> Consumers are attracted by lower prices -> consumers buy the product but producers reduce quality which reduces effectiveness of product -> Decreases standard of living.
Evaluating the impact of competition on producers
Points
Evaluations
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Competition is good for producers because it pushes them to become more efficient and productive, which can increase output, improve worker satisfaction, and raise profits. In the long run, firms may also benefit from economies of scale, better use of factors of production, stronger marketing, and a better reputation as higher productivity helps them gain market share.
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Competition is good for producers because it can encourage innovation and product differentiation, helping firms stand out and attract more consumers. This can increase market share, improve product quality, and build brand loyalty, making customers less likely to switch to substitutes.
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Profits won’t be as high because they are decreasing price almost to the point where revenue = cost. Costs might even increase because in order to increase efficiency and output they have to invest into more factors of production (capital and labour and better quality land), and if production does increase then workers might demand higher wages. If the firm was in a monopoly previously, then the competition might lead to less profits than previously.
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Innovation is hard to do so those who are unable to do so, or unable to reduce prices will be forced out of the market.
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Competition is bad if they were a monopoly originally as they will make less profit and will have to invest to improve quality and become more efficient, might even lose economies of scale