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Competitive Markets (Features of competitive markets (competitive pricing…
Competitive Markets
Features of competitive markets
the more control one of more firms acting together have over the quantity supplied and price in a market the less 'perfect' the market is
competitive pricing strategies
destruction pricing
pricing rival products lower than competitors costs to 'destroy' their sales and to force competitors to exit the market
price wars
competitors undercutting each others' prices. All firms lose money. Occur in markets dominated by little firms
Follow-the-leader pricing
it involves firms in the market setting its prices equal to those of its closest rivals. If the price lead raise its prices, all other firms in the market will do the same, vice versa
product differentiation
it is changing product features such as brand name, image shape, taste, color, durability, warranty period or after-sales care
'small numbers' competition
Collusion occurs which is competitors undercutting each other which is very damaging to their profits so the firms may instead agree to act together to control market supply and set common prices, much the same as a pure monopoly
how would a market be considered competitive
vigorous price competition and non-price competition between firms supplying the market
firms pursue different pricing, output and advertising strategies depending on the type and amount of competition they face from new and existing competitors
product features and brand images will be highly differentiated and the range of product features and designs available, the quality of after-sales services and product prices will tend to change frequently as firms develop new ones they hope will attract consumer demand away from rival suppliers
market shares and profits of competing businesses will vary over time through competition and as new businesses enter the market and inefficient firms are forced to exit the market
What is market structure?
the characteristics of a market that influence the behavior of buyers and sellers and the market outcomes they achieve in terms of protect quantity, quality and price
the number of firms competing to supply the market
how much competition there is between those firms
the ability of each firm or group of firms acting together, to determine the market
the ease with which new firms can enter the market to compete with existing firms
degree of competition
good for consumer
encourage private sector firms to make the best use of their scarce resources in order to maximize their profit
only when they produce items that consumers want at prices they are willing and able to pay that exceed their costs of producing
firms producing similar products compete for consumers by offering the most attractive product features at the lowest possible price
keep cost of production as low as possible
restrictions on competition results in a misallocation of scarce resources with higher costs and prices and fewer wants satisfied
Price competition
competing to offer consumers lowest or best possible prices for rival products
cutting prices of rival products helps to boost sales and market shares at the expense of competing firms
constrained by market conditions and its production costs
if demand is price inelastic, cutting price may not boost sales and it will also reduce the profit margin between price and average cost
non-price competition
competing on all other product features other than price
involve new product development, product placements in different retail outlets and at trade fairs, providing after-sales care and promotional campaigns
including advertising, attractive in-store displays, running competitions and issuing consumer loyalty cards
it is important as consumers do not just compare product prices
consumers look for best value of money in terms of quality of good or service, ease of purchase, levels of customer service and good after-sales care should anything go wrong and they want to exchange their products
perfect competition
perfect competition
a large number of firms compete to supply the market
each firm produces a small share of the total market supply
all firms supplying the market have perfect knowledge
all firms have access to the same materials, technical knowledge, equipment and skills and will therefore face the same costs and be able to supply products of equal quality
each firm supplies the same identical product
there is no conduct differentiation. All of the products supplied to the market by all the different firms all look, smell, taste, etc. the same and have the same quality. That is, they all supply a homogenous products
all firms are price takers and can only maximize their profits by selling as much as they can at the market price
there are so many firms competing to supply identical products, no one firm is able to raise its price. If a firm does increase its price its sales will fall to zero as consumers will buy the product from other firms
profits will attract new firms into the market. New firms can enter and the market freely
competition will lower the market price and reduce profits until firms remaining in the market earn only normal profits (the minimum amount of profit they need to stay in the market)
monopoly
only one firm supplies the market
a pure monopoly controls the total market supply. Consumers must either buy the product of the monopoly or go without
the firm is a price maker
the monopoly can determine the quantity it will supply to the market and therefore determine the market price. For example, by restricting market supply a monopoly can raise the market price
new firms will be prevented from entering the market
New, smaller firms will find it difficult to compete with a large monopoly. The monopoly may also use pricing and other strategies to protect its market position from competition
the firms will be able to earn abnormal profits
a monopoly can set a market price that will earn it a very high or excessive profit. by preventing new firms from entering it market it can also ensue its excess profit are not competed away