Competitive Market Structures
Competitive Market Structures
A market consists of buyers and sellers. For example, the market for mobile phones consists of sellers such as Apple, Samsung and Google whose products are sold to buyers/consumers either directly or through retail sales outlets (online or physical shops). Individual sellers - the retailers - compete with each other to persuade consumers to purchase products from them rather than their competitors. The reward for suppliers when completing a successful sale is profit. This is the basis of a market economy - private businesses competing against each other in order to secure sales and make a profit.
The market economy is subject to a number of factors and influences that result in different market structures. Each of these structures has an impact on the pricing and output decisions of business organisations.
The market structure determines the amount of power and competition in the market.
A business will need to understand its market structure in order to plan strategically and operationally. There are four types of market structure:
Perfect competition: Perfect competition is a theoretical market structure where there are many sellers offering identical products. There are no barriers to entry for new businesses, meaning new firms can easily enter the market. In perfect competition, no single business dominates the market, and all firms are considered price takers because they must accept the prevailing market price. Businesses operating in perfect competition have a small market share. Perfect competition is rare in the real world, but examples of industries that approach this structure include newspapers and basic food products.
Imperfect competition: Imperfect competition is a broad term encompassing various market structures where the conditions of perfect competition do not hold. In imperfect competition, businesses have the ability to differentiate their products and services, which can lead to variations in price and quality. Branding plays a crucial role in imperfect competition, as businesses strive to create a unique identity for their offerings. An example of imperfect competition is the automotive industry, where companies like Audi and BMW differentiate themselves through quality, features, and brand image.
Monopoly: A monopoly is a market structure in which a single firm controls the entire market for a particular product or service. This means that there are no close substitutes available for consumers. Monopolies can arise due to various factors, such as exclusive ownership of a key resource, government-granted monopolies, or patents. Monopolies have significant market power, allowing them to set prices and output levels without facing competition.
Oligopoly: An oligopoly is a market structure characterized by a small number of large firms that dominate the market. In an oligopoly, the actions of one firm significantly impact the others, leading to interdependence. Oligopolies often arise in industries with high barriers to entry, such as significant capital investments or economies of scale. Examples of oligopolies include the airline industry and the telecommunications industry.
Perfect competition is a theoretical market structure where many firms sell identical products.
There are no barriers to entry or exit, and all firms are price takers, meaning they must accept the prevailing market price for their products.
In perfect competition, businesses have a small market share, which is the percentage of a given market held by a particular business.
Because perfect competition is a theoretical model, it is extremely rare in real-world markets.
Some industries that come closest to perfect competition include newspapers and basic food products.
In imperfect competition, businesses can differentiate their products and services, leading to variations in price and quality.
Branding, the practice of creating a unique name and image for a business or product, is a key strategy in imperfect competition.
The automotive industry is a good example of imperfect competition, with brands like Audi, BMW, and Mercedes competing on factors such as quality, features, and brand image.
The intensity of competition varies among industries, which affects profitability.
Businesses operating in any market must be aware of their competitors, which are any entities selling the same or similar products and services. Analyzing competitors is critical for businesses to avoid negative impacts on profitability and ensure long-term survival. Businesses must understand their competitors' product range, location, pricing, quality, and unique selling propositions (USPs).
Competition exists at local, national, and international levels.
Local competition includes businesses operating within a short traveling distance for customers, such as those located on the same high street, retail park, or nearby village.
National competition encompasses businesses operating on a nationwide basis, with stores and customers spread across the country. These businesses might have multiple physical stores or operate online with a national distribution network.
International competition involves businesses that operate across multiple countries around the world, such as McDonald's, or online-only businesses with global distribution networks like Amazon
Several factors influence a business's competitive advantage, including:
Several analytical frameworks can be used to assess the competitive environment of a business, such as:
PESTLE Analysis: This framework examines the Political, Economic, Social, Technological, Legal, and Environmental factors that affect a business.
SWOT Analysis: This framework identifies a business's internal Strengths and Weaknesses, as well as external Opportunities and Threats.
5Cs Analysis: This framework focuses on the Company, Competitors, Customers, Collaborators, and Climate.
Porter's Five Forces: This framework examines the Intensity of Competitive Rivalry, Threat of Substitute Products, Bargaining Power of Buyers, Threat of New Entrants, and Bargaining Power of Suppliers.
These frameworks can be used to analyze specific businesses, such as McDonald's or Tesco, and to understand the factors that shape their competitive landscape.