Operating In Competitive Markets aqa

Markets and competition

• A market exists where one entity has a product to sell to another entity who wishes to purchase it, resulting in trade

• Markets can exist in a variety of forms:

  • Global and international markets exist where buyers and sellers trade across national boundaries

    • E.g. The market for fast food is international

  • National markets exist where buyers from the same country engage in trade

    • E.g. The market for Stilton cheese is national

  • Local markets exist where buyers and sellers are in close proximity to each other

    • E.g. The market for driving lessons tends to be local

• The market, alongside factors such as costs and promotional activity, determines the price of products

The nature of competition

• Competition exists when there is more than one business supplying goods to consumers in a market

Types of competition

Monopoly markets

• In a small number of markets, one business meets all consumer demand

  • This is called a monopoly market

• In the UK, these markets have often emerged as a result of privatisation, where public sector monopolies were transferred to private ownership in the 1980s

  • Examples include water supply and waste treatment, as well as some transport services, including ferry services to remote Scottish islands

Oligopoly markets

• In an oligopoly, a few large businesses dominate the market

  • Examples include UK supermarkets, electricity suppliers, and broadband suppliers

  • Most business sectors in the UK are dominated by this type of competition

More perfectly competitive markets

• In some cases, a large number of small and medium-sized businesses compete to meet market demand

  • This is called perfect competition

  • Examples include restaurants, nail bars, home services such as plumbers

The impacts of competition

• The impact of competition depends on the number of businesses that are attempting to meet demand in the market

Competition in monopoly markets

• Businesses that operate as the single provider in a market do not need to compete with rivals

• Monopoly businesses’ price policies are controlled by the government, to ensure that they do not overcharge for their services

  • Monopoly businesses can make large profits

  • They do not need to spend money on product innovation, advertising or market research

  • Some monopolies are criticised for their failure to invest in infrastructure whilst rewarding shareholders with large dividends

  • Customers cannot shop around for a better deal

  • If customers need to buy products sold by monopoly businesses, their needs are unlikely be fully met as products are standardised

Competition in oligopoly markets

• Where a small number of large firms dominate a market, there is often limited price competition

  • Prices are often similar between powerful firms, with large sums spent on promotion to differentiate products

  • Smaller businesses may be able to offer lower prices, but they are likely to struggle to survive

  • Products are quite similar but, often, highly branded to appear different to those of rivals

  • Customers have some choice, but this is often on the basis of quality, product range, accessibility of the business and customer service

  • Product development is a key way to compete in oligopoly markets, with new and improved products helping key brands stand out from rivals and encourage customer loyalty

  • In some oligopoly markets, governments intervene to ensure that no one business becomes too powerful

    • E.g. the UK government blocked the takeover of failing UK supermarket Safeway by market leaders Tesco, ASDA and Sainsburys

Competition in more competitive markets

• Where many small and medium-sized businesses compete to meet market demand, price competition is likely to be most intense

  • Customers can switch with ease between the many different providers of products

  • Customers have a high level of choice between businesses offering a wide range of unique products

  • Businesses that can afford to do so invest in innovation and product differentiation to build market share

  • Customers can be persuaded to become loyal to businesses through excellent customer service and products that meet their needs closely