ITB Unit 2 Lecture 2 - Competition and Market Structures

8/7/2019 ITB Unit 2 Lecture 2 - Competition and Market Structures

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Introduction to Business

Unit 2: Business Environment

Lecture 2: Competition and Market

Structures

Competition and Market Structures Lecture 1 - 1.½#¾

Learning Objectives

What is:

� Competition

� Market Structures

What is Competition?

General:

Any rivalry

Business:

Businesses acting

independently to offer the

consumer the most

favourable terms

Competition

Businesses operate

in competition witheach other

This creates a

healthy business

environment thatbenefits both

businesses and the

customers.

Why Competition is Important?

If there is only one

retailer

If there are several

retailers

the product may not be

competitively priced.

each retailer will lower

the price in an attempt

to win customers.

Class Exercise

Think about a local company with which you are

familiar and discuss:

� who their competitors are

� how these might effect them and their customers

10 minutes

Definition of a Market

A market is an arrangement whereby

goods or services are exchanged for

money.

Barriers to Entry into a Market� High start-up costs or other obstacles that

prevent new competitors from easily

entering an industry or area of business

� These benefit existing companies alreadyoperating in an industry because they

protect revenues and profits from beingreduced by new competitors.

Some Examples of Barriers� Technological patents

� Patents on business processes

� Strong brand identity

� Strong customer loyalty

� High customer switching costs

� Trademarks� High funding requirements

Low Barriers

If only a small amount of capital is needed toset up business in a market the barriers to

entry in that market are low.

� Likely that many firms will be operating inthat market so«

� Likely that competition will be high

High Barriers

In markets where a large amount of capital isneeded to start up operations, the barriers to

entry are said to be high.

� Likely that only a few firms will be operatingso«

� Likely that competition will be low

For Example� If you want to open a fruit and vegetable shop, it is

relatively easy to do so; the barriers to entry are

� If you wanted to become a manufacturer of cars,

the barriers to entry are considerable. You will

need several billion dollars to be able to complete

with existing firms in the market.

MarketS

tructuresMarket structure refers to the state of a market with

respect to competition.

Broadly, there are four major market structures:

� Perfect Competition

� Monopoly

� Oligopoly

� Monopolistic Competition

Perfect Competition

� Many buyers and sellers

� Sellers have to accept the market price

� Individual seller cannot influence price

� All companies sell the same product

� Buyers and sellers the price charged by each company

� Free entry and exit to industry

Examples of Perfect Competition

Although a perfectly competitive market

is never found in practice, the following

all have a lot of the characteristics:

Ag riculture

Stock Exchang e

Currency

Markets

Bond Markets

Monopoly� A monopoly is when all, or nearly all, of the market

is dominated by one seller, producer or group.

� The business may make higher profits.

� Noted absence of competition which may lead to:

- Higher prices

- Low quality products

- Less choice

Examples of MonopoliesUtilities such as:

Electric Cable

TelevisionWater

Companies

Oligopoly

� May be large number of firms in the industry

� Industry is dominated by small number of very large producers

� Competition amongst the few

� High Barriers to entry

� Price stability

� Abnormal Profits

� Interdependence between firms

Examples of Oligopolies

Broadcasting Supermarkets

Banks and building

societiesOil companies

Medicinal Drug

Companies

Monopolistic Competition

� Many Buyers and Sellers

� The product differs from other products in some way.

� The exact product cannot be obtained from another source.

� Some control over price

� Brand loyalty

� Can raise prices without losing all of its customers

� Tiny monopoly over product

� Relatively free entry and exit

Examples of Monopolistic Competition

R estaurants

Clothing Shoes

Cereal

Class Activity

Monopolistically competitive markets can be found in a widerange of industries:

� One major area is in clothing retailing, and other small

businesses.

� Many service markets are monopolistically competitive, e.g.restaurants and shoe shops.

� Make a list of other examples

10 minutes

Conclusions� Businesses operate in competition with

each other and this creates a healthy

business environment.

� Market Structures comprise of perfect

competition, monopolies, oligopolies and

monopolistic competition.

Competition and Market Structures Unit 2 Lecture 2 - 2.24

Unit 2 Lecture 2

Any questions?

ITB Unit 2 Lecture 2 - Competition and Market Structures

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