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Chapter 2.5 - Competition (Non-Price Competition (Marketing is also…
Chapter 2.5 - Competition
Why do Producers Compete?
Survival
Existing consumers need to be persuaded to come back and new consumers need to be enticed to try the product
Firms often extend their range of products to persuade their consumers to buy more from them
Firms often find it necessary to compete for consumers and market share to survive the market
Profit
Profit is needed for a firm to both survive and grow
Profit is needed for investment to expand the business and innovate
Producers able to innovate can strongly compete in the market successfully
Market Entry
It can do this by advertising or by offering the product at a low price
This will force existing producers to respond
To enter a new market, a producer needs to devise ways to persuade consumers to buy its products
Non-Price Competition
Marketing is also another way to compete and the best known way is advertising
One of the aims of advertising is to create and ensure consumer loyalty to a certain brand
Quality of the product is also another way of competing
Buyers are often willing to pay higher prices for a brand they know
Small producers can often compete by offering a specialist product or a better and more personalized consumer service
Price Competition
This could potentially cause that firm to go out of business
Firms cannot sell at less than cost-price for any length of time as this will also result in them going out of business
Any firm that cant do this will find itself losing customers
Price competition is limited
Firms lower their prices to gain customers and market share
Impact of Competition
On Producers
Firms will no longer demand the skills and labour of workers and increase unemployment
Those who are slow to adapt will go out of business
Force producers to innovate and expand their output to meet the demand therefore making greater profits
It forces producers to improve their efficiency including finding ways to reduce their costs
On Consumers
Firms that are not wanted will be forced out of the market
Producers may introduce goods that are directly or indirectly harmful to consumers
Innovation and inventions increase the choice and variety of goods and services available
Competition leads to a fall in price and an improvement in the quality of the products offered and an increase in quality of life
Advertising may persuade consumers to buy products they do not need
Monopoly
Monopolies exist because they have barriers to entry. These may be:
Legal ones
Greater efficiency than potential rivals due to very large economies of scale, which reduce the costs for larger producers
Location, so that even small firms can be monopolies (in villages a shop could be a monopoly)
Copyrights and patents that prevent copying while they exist
Unless the government or a regulator prevents it, monopolies can set the price or the quantity of products in the market
A monopoly is a sole producer of a good or service
Legally a monopoly exists when one provider has at least 25% of the market
Oligopoly
While there is no precise limit to how many firms there can be in an oligopoly, the number must be low enough to ensure that the actions of one firms have a significant effect over and influence on the other firms
An oligopoly does not prevent the existence of small firms producing or selling the same type of products
Technically an oligopoly is said to exist if the five largest firms have 50% or more of the market share
Oligopolies will have barriers to entry, they are usually not sufficient to prevent other firms entering the market and increasing competition
Oligopoly is where a small number of firms control the large majority of market share
How do Monopoly and Oligopoly Markets Differ from Competitive Markets?
Monopolies are more likely to be able to have lower costs as they have large economies of scale meaning they can charge a low price
If firms grow in the competitive market, the market is moving towards an oligopoly
Firms involved in a competitive market tend to be smaller than in monopolies and oligopolies