2.5.3 The Competitive Environment

Competitive environment

🔗 The number and types of businesses against which a given business competes in its industry.

Barriers to entry

🔗 Factors that limit the chance of new firms from entering a market.

Competition is important as it prevents businesses from dominating the market and charging higher prices. It also gives customers more choice from which business they choose to buy from.

Markets can be

• Global
• National
• Regional

Market types and their characteristics

Name: Monopoly.

Number of competitors: 1.

How the market operates: High prices, lack of choice, high barriers, high profit, innovative products.

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Name: Duopoly.

Number of competitors: 2.

How the market operates: Still a lack of choice, high barriers and innovative products.

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Name: Oligopoly.

Number of competitors: Multiple/a few.

How the market operates: More choice, barriers, variable prices, USPs for businesses.

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Name: Perfect (high) competition.

Number of competitors: Lots.

How the market operates: Wide range of choice, set by demand, homogenous products, low profit, non-existent barriers.

How firms can respond to a competitive market

• Price cuts - Attract value-for-money customers and undercuts competitors.
• Product differentiation - Unique product which attracts customers to something no one else has.
• Research and development - Technology improves the quality of products which attracts more customers. In some cases, being a monopoly is a good thing. Businesses such as Severn Trent Water and The National Grid are government-regulated and therefore won't exploit their position by charging high prices.

Collusion

🔗 When a group of businesses illegally work with others often to the detriment of other businesses and customers.

Anti-competitive tactics

🔗 Methods decided by businesses to wipe out other businesses and make their situation better. E.G Price fixing.

Whistle-blower

🔗 Usually an individual in the business that tells people about unlawful activity.