Welcome to Competition in Economics!
Have you ever wondered why smartphones keep getting better cameras every year, or why supermarkets are always battling over the lowest price for milk? The answer is competition!
In this chapter of Producing and Consuming, we will explore how businesses battle for customers, what happens when there is lots of competition, and what happens when only one big firm rules the market. Don't worry if economics feels tricky at times — we will break down every idea step by step with relatable, everyday examples.
1. What is Competition?
In economics, competition refers to the rivalry between businesses trying to sell their goods or services to the same group of consumers.
Think of it like a sports tournament: every business wants to win the ultimate prize — consumer spending and a bigger market share.
Key Definition: Market Share
Market share is the percentage of total sales in a market that is held by a single business.
\( \text{Market Share (\%)} = \left( \frac{\text{Sales of One Business}}{\text{Total Sales in the Market}} \right) \times 100 \)
Did You Know?
In the UK supermarket sector, giant brands like Tesco, Sainsbury's, Asda, and Morrisons constantly monitor each other's prices every single day just to protect their market share!
2. Price Competition vs. Non-Price Competition
Businesses do not just compete by lowering prices. They use two main strategies to win over customers:
A. Price Competition
This happens when firms try to attract buyers by offering lower prices or special discounts.
• Special offers: "Buy One Get One Free" (BOGOF) or temporary discounts.
• Price matching: Promising to refund the difference if you find the item cheaper elsewhere.
• Everyday low prices: Keeping overall prices as low as possible (e.g., budget airlines or discount grocers).
B. Non-Price Competition
This happens when firms compete using methods other than price to make their product stand out.
• Product Quality & Design: Making items that last longer, look cooler, or perform better (e.g., Apple vs. Samsung).
• Advertising & Branding: Creating strong brand loyalty through famous logos, slogans, and celebrity endorsements.
• Customer Service: Offering friendly staff, easy returns, and fast delivery.
• Loyalty Schemes: Rewarding repeat buyers with points, club cards, or freebies.
• Location & Convenience: Having stores in prime city spots or providing a seamless mobile app.
Key Takeaway: Price competition focuses on the price tag; non-price competition focuses on making the product better, more famous, or more convenient.
3. Market Structures: How Much Competition Exists?
Not all markets have the same amount of competition. Economists look at different market structures based on how many firms operate in them.
Structure 1: Highly Competitive Markets
In a highly competitive market, there are many buyers and many sellers.
• Product similarity: Goods are very similar or identical (e.g., local fruit and vegetable stalls, window cleaners).
• Barriers to entry: Very low. It is easy for new businesses to start up and join the market.
• Price power: Individual firms have very little control over price; they are price takers because if they charge too much, buyers will simply go to another seller.
Structure 2: Monopoly
A pure monopoly occurs when there is only one single supplier of a good or service in the market.
(Note: In UK competition law, a business with a market share of \(25\%\) or more is considered to have monopoly power).
• Barriers to entry: Extremely high. High setup costs, legal patents, or exclusive access to resources stop new rivals from entering.
• Price power: The firm is a price maker. It has strong control over the price it charges because consumers have no alternative sellers to turn to.
Structure 3: Oligopoly
An oligopoly exists when a market is dominated by a few large firms.
• Examples include UK mobile phone networks (EE, O2, Vodafone, Three) and the major supermarket chains.
• Interdependence: The actions of one firm directly affect the others. If one cuts prices, the others often follow immediately.
• Focus on non-price competition: Large firms often avoid fierce price wars because they reduce profits for everyone, focusing instead on heavy advertising and loyalty perks.
4. The Impact of Competition
Competition has widespread effects on consumers, producers, workers, and the wider economy.
Impact on Consumers
Advantages for Consumers:
• Lower Prices: Rivals undercut each other, leaving more money in consumers' pockets.
• Better Quality & Innovation: Firms improve products to stay ahead (e.g., better battery life on laptops).
• Greater Choice: A wide variety of styles, flavours, and brands to suit different tastes.
• Improved Customer Service: Businesses work harder to keep shoppers happy.
Disadvantages for Consumers:
• Confusion: Too many choices and complex pricing plans (e.g., energy tariffs or mobile contracts) can make it hard to find the best deal.
• Lower Quality shortcuts: Some firms may cut corners with cheaper materials to keep prices low.
Impact on Producers (Firms)
Advantages for Producers:
• Incentive for Efficiency: Pushes firms to cut waste and find cheaper production methods.
• Innovation: Successful new ideas can lead to high sales and strong brand loyalty.
Disadvantages for Producers:
• Lower Profit Margins: Price wars can squeeze profits drastically.
• Risk of Closure: Inefficient businesses that cannot keep up will lose customers and go out of business.
Impact on Workers and the Economy
• For Workers: Successful firms create new jobs. However, firms trying to cut costs might freeze wages or replace staff with machines.
• For the Economy: Competition encourages economic efficiency and innovation, ensuring resources are used where consumers value them most.
5. Memory Aids and Revision Tools
Mnemonic for Non-Price Competition: "B-Q-A-L-S"
Remember B-Q-A-L-S (pronounced "Be-Quals"):
• Branding
• Quality
• Advertising
• Loyalty schemes
• Service to customers
Comparison Snapshot
Competitive Market: Many small firms | Low barriers to entry | Price takers | Low prices for consumers.
Monopoly: One single firm | High barriers to entry | Price maker | Risk of high prices and lack of choice.
Oligopoly: Few large firms | High barriers to entry | Interdependent | Heavy branding and loyalty rewards.
6. Common Mistakes to Avoid in Exams
• Mistake 1: Thinking competition is only about lower prices. Always remember to discuss non-price competition (branding, service, quality).
• Mistake 2: Confusing a price maker with a price taker. Monopolies are makers (they set the price); small competitive firms are takers (they must accept the going market price).
• Mistake 3: Claiming that monopolies never innovate. While they face less pressure, monopolies often have large profits that can be invested into expensive research and development (R&D).
Quick Review Quiz Checklist
Before moving on, check that you can answer these questions with confidence:
1. Can you give two examples of non-price competition?
2. Why does high competition usually lead to lower prices for consumers?
3. What is the difference between an oligopoly and a monopoly?
4. How do high barriers to entry protect a monopoly from new rivals?