Competition

Introduction to Competition

Welcome to your study notes on Competition! This chapter is part of the External Influences section. In business, competition is like a race where every company is trying to win the prize: the customer's money. Understanding how competition works helps us understand why some businesses thrive while others struggle.

We will look at the different "rules of the game" (market structures), why businesses decide to join or leave a market, and how the level of competition changes how a manager makes decisions. Don't worry if some of the terms like "Oligopoly" sound like another language—we will break them down into simple pieces!

1. What is Competition?

Competition occurs when two or more businesses act independently to supply goods or services to the same group of customers. They are basically "fighting" for market share.

Example: Think of your local high street. If there are three different coffee shops, they are in competition. They might compete by having lower prices, better-tasting cake, or even just faster Wi-Fi.

Why does the strength of competition matter?

The "strength" of competition refers to how hard it is for a business to stay ahead.

• High Competition: Many rivals. This usually leads to lower prices for customers and forces businesses to be innovative (coming up with new ideas) to stand out.
• Low Competition: Few rivals. The business has more power to set higher prices and might become "lazy" because they don't fear losing customers.

Quick Review: Competition is a rivalry. High competition benefits consumers (lower prices) but makes it harder for businesses to earn high profits.

2. Market Structures: The "Types" of Competition

The syllabus requires you to know three specific market structures. Think of these as different types of "playgrounds" where businesses operate.

A. Monopoly

A Monopoly is when a single business dominates the entire market (purely, this is 100% market share, but legally it is often cited as 25% or more in the UK).

• Key Features: Only one (or one very dominant) supplier; no close substitutes for the product; very high barriers to entry (it’s almost impossible for new firms to join).
• Decision Power: High. They are "Price Makers"—they can often set the price they want.
• Example: In many areas, the company that provides your water is a monopoly. You can't just choose another tap water provider!

B. Oligopoly

An Oligopoly is a market dominated by a few large businesses.

• Key Features: A few "giants" own most of the market share; products are often similar but branded; businesses are interdependent (what one does, the others must react to).
• Decision Power: Moderate. They prefer non-price competition (like big advertising campaigns or loyalty cards) because "price wars" hurt everyone’s profits.
• Example: The UK supermarket industry (Tesco, Sainsbury's, Asda, Morrisons) or the mobile network providers (EE, O2, Vodafone, Three).

C. Monopolistic Competition

Don't get confused! This is not a monopoly. Monopolistic Competition involves many small businesses selling products that are slightly different from each other.

• Key Features: Many buyers and sellers; low barriers to entry (easy to start the business); products are "differentiated" (they feel different to the customer because of branding or quality).
• Decision Power: Low to Moderate. They have some control over price because their brand is unique, but if they charge too much, customers will just go to a rival.
• Example: Hairdressers, independent coffee shops, or pizza takeaways.

Memory Aid: The "O" Rule
Monopoly = Mono (One)
Oligopoly = Only a few
Monopolistic = Many small shops

3. Entry and Exit: Joining and Leaving the Race

Businesses aren't stuck in one market forever. They choose to enter or exit based on how much profit they think they can make.

Why Enter a Market?

• High Profit Potential: If existing firms are making huge profits, new firms want a piece of the action.
• Market Growth: If more people are starting to buy a product (e.g., electric scooters), new businesses will jump in.

Why Exit a Market?

• Consistent Losses: If the business is losing money and can't see a way to fix it.
• Decreasing Demand: If customers stop buying the product (e.g., DVD rental shops).

Barriers to Entry and Exit

Sometimes, it's not easy to just "start" or "stop" a business. These obstacles are called barriers.

Barriers to Entry (Obstacles to joining):

• High Startup Costs: Needing millions for factories or technology.
• Patents/Legal Barriers: Only one company is legally allowed to make a specific invention.
• Strong Branding: It's hard to compete with a brand everyone already loves (like Coca-Cola).

Barriers to Exit (Obstacles to leaving):

• Redundancy Costs: Having to pay employees a lot of money to let them go.
• Specialised Assets: Owning a machine that can only do one thing and cannot be sold easily.

Key Takeaway: Barriers to entry protect big firms from new rivals. High entry barriers are why Monopolies and Oligopolies can stay dominant for so long.

4. Competition in Different Contexts

Competition feels different depending on where the business is looking.

• Local Context: Small businesses usually compete with others in their immediate town. Example: A local baker competing with the bakery in the next street.
• National Context: Large businesses compete across the whole country. This often involves massive advertising. Example: British Airways vs. EasyJet for UK flights.
• Global Context: Businesses compete with companies from all over the world. This is much tougher because global rivals might have lower costs. Example: Apple (USA) vs. Samsung (South Korea) vs. Huawei (China).

5. How Market Structure Affects Decision Making

The "power" a manager has to make decisions depends heavily on the competition around them.

The "Price Maker" vs. "Price Taker" Concept:

• In a Monopoly, the business is a Price Maker. They can decide to raise prices to increase profit margins because customers have nowhere else to go.
• In a Highly Competitive Market, the business is a Price Taker. They must follow the "market price." If they charge \( \$1 \) more than everyone else, they lose all their customers.

Common Mistake to Avoid: Students often think competition is always bad for business. While it makes it harder to earn profit, competition can also drive a business to become more efficient, which can actually help them grow stronger in the long run!

Quick Review Quiz (Mental Check)

1. Which market structure has just a few large dominant firms? (Answer: Oligopoly)
2. What do we call an obstacle that stops a new firm from starting up? (Answer: Barrier to entry)
3. Why might a firm exit a market? (Answer: Consistent losses or falling demand)
4. True or False: A Monopoly is a "Price Taker." (Answer: False - they are Price Makers)

Summary Table for Revision

Monopoly: One firm, Unique product, Very high barriers, Price Maker.
Oligopoly: Few large firms, Branded products, High barriers, Price stability/Non-price competition.
Monopolistic Competition: Many small firms, Differentiated products, Low barriers, Some price control.