competition-and-market-conditions

Competition

• Competition describes how many rival businesses operate in a market and how strong they are

  • In a monopoly market, there is one dominant seller (e.g. a local water company)

  • In an oligopoly market, there are usually four to seven large rivals (e.g. UK supermarkets)

  • In a competitive market, there are many small firms, none of which have significant power (e.g. hairdressers)

The level of competition

How competition affects business costs

1. Price wars force cost-cutting

   • Tesco’s ongoing competition with Aldi/Lidl pushes all grocers to squeeze suppliers for lower costs and reduce their own overheads

2. Higher marketing spend

   • An increase in rivals usually requires more promotional activities such as advertising and loyalty schemes

   • E.g. mobile network EE offers “unlimited calls/data” deals to attract customers from rivals

3. Need for product innovation

   • In oligopoly markets such as smartphones, businesses such as Samsung spend large amounts on R&D to stay ahead

4. Bulk-buy savings for big players

   • Size gives dominant businesses bargaining power, lowering their costs

   • E.g. BT Openreach is able to buy telecommunications cable in large quantities, reducing its cost per unit

5. Regulatory costs

   • Monopolies often face price caps that restrict their ability to maximise profits

   • E.g. the UK government imposes a maximum amount that suppliers such as British Gas can charge households for each unit of energy they use

How competition affects demand

1. Price elasticity of demand

   • When customers can choose substitutes, a small price rise often sends them to rival businesses

     • E.g. as a result of rises in rail fares in the UK, budget airlines such as Ryanair sell more domestic flights

2. Customer choice

   • With many rival businesses to choose from, buyers can switch for convenience, features or ethics

   • In a monopoly, there is little consumer choice

     • E.g. with no competition, Thames Water faces little customer switching, so demand stays stable

3. Brand loyalty matters in crowded markets

   • E.g. Nike retains demand despite many trainers in the market by investing in image and sponsorships

Market conditions

• Market conditions describe what the market looks like right now, including:

  • how fast the market is growing or shrinking

  • how many buyers and sellers there are

  • whether firms trade mainly in a local area, across the UK or worldwide

How market conditions affect costs

1. Fast-growing markets invite new entrants

   • More suppliers chasing the same raw materials can drive prices up

   • E.g. oat prices have increased dramatically since more UK oat-milk brands have entered the market

2. Shortage of supply raises production costs

   • E.g. the 2021–22 global chip shortage forced Jaguar Land Rover to halt production lines and pay more for semiconductors used in vehicles

3. Local markets keep distribution cheap

   • E.g. a village bakery’s van covers a few miles, whereas Greggs’ nationwide network pays for HGV fleets and fuel to deliver products to its outlets

4. National or international reach adds compliance costs

   • E.g. exporting cheese to the EU now requires health certificates, language-specific labels and possible tariffs

5. Economies of scale in large, growing markets

   • E.g. booming demand for heat pumps lets UK installers bulk-buy units, cutting their unit costs

How market conditions affect demand

1. High market growth lifts demand

   • E.g. plant-based food sales rose 18% a year between 2019 and 2023, so Quorn saw revenue jump even without aggressive price cuts

2. Oversupply intensifies price competition

   • E.g. too many ride-hail apps in London led to some Uber drivers offering discount codes, reducing their profit margins

3. National brands tap a wider customer pool

   • E.g. as JD Sports sells online across the UK, reductions in demand in any single town have little impact on its overall performance

4. Global markets broaden demand but add exchange-rate risk

   • E.g. BrewDog’s recent US expansion boosted sales, but a strong pound has made its UK-made beer seem expensive overseas