Competition and Market Conditions (AQA A Level Business) : Revision Note
Competition
Competition describes how many rival businesses operate in a market and how strong they are
In a monopoly market there is one dominant seller (e.g. a local water company)
In an oligopoly market there are usually 4-7 large rivals (e.g. UK supermarkets)
In a competitive market there are many small firms, none of which have significant power (e.g. hairdressers)
The level of competition
How competition affects business costs
Price wars force cost-cutting
Tesco’s ongoing competition with Aldi/Lidl pushes all grocers to squeeze suppliers for lower costs and reduce their own overheads
Higher marketing spend
More rivals usually requires more promotional activity, such as advertising and loyalty schemes
E.g. mobile network EE offers “unlimited calls/data” deals to attract customers from rivals
Need for product innovation
In oligopoly markets like smartphones, businesses such as Samsung spend large amounts on R&D to stay ahead
Bulk-buy savings for big players
Size gives dominant businesses bargaining power, lowering their costs
E.g. BT Openreach is able to buy telecommunications cable in large quantities, reducing its cost per unit
Regulatory costs
Monopolies often face price caps that restrict their ability to maximise profits
E.g. the UK government imposes a maximum amount suppliers such as British Gas can charge households for each unit of energy they use
How competition affects demand
Price elasticity of demand
When customers can choose substitutes, a small price rise often sends them to rival businesses
E.g. as a result of rises in rail fares in the UK, budget airlines such as Ryanair sell more domestic flights
Customer choice
With many rival businesses to choose from, buyers can switch for convenience, features or ethics
E.g. In 2018 independent chain Boston Tea Party banned single-use takeaway cups and asked customers to bring a reusable one instead. This appealed to eco-conscious drinkers who switched to the brand
In a monopoly, there is little consumer choice
E.g. With no competition, Thames Water faces little customer switching, so demand stays stable
Brand loyalty matters in crowded markets
E.g. Nike retains demand despite many trainers by investing in image and sponsorships.
Market conditions
Market conditions describe what the market looks like right now, including:
How fast a market is growing or shrinking
How many buyers and sellers there are
Whether firms trade mainly in a local area, across the UK or worldwide
How market conditions affect costs
Fast-growing markets invite new entrants
More suppliers chasing the same raw materials can drive prices up
E.g. oat prices have increased dramatically since more UK oat-milk brands have entered the market
Shortage of supply raises production costs
E.g. the 2021-22 global chip shortage forced Jaguar Land Rover to halt production lines and pay more for semiconductors used in vehicles
Local markets keep distribution cheap
E.g. a village bakery’s van covers a few miles, whereas Greggs’ nationwide network pays for HGV fleets and fuel to deliver products to its outlets
National or international reach adds compliance costs
E.g. exporting cheese to the EU now requires health certificates, language-specific labels and possible tariffs
Economies of scale in large, growing markets
E.g. booming demand for heat pumps lets UK installers bulk-buy units, cutting their unit costs
How market conditions affect demand
High market growth lifts demand
E.g. plant-based food sales rose 18 % a year between 2019 and 2023, so Quorn saw revenue jump even without aggressive price cuts
Oversupply intensifies price competition
E.g. too many ride-hail apps in London led to some Uber drivers offering discount codes, reducing their profit margins
National brands tap a wider customer pool
E.g. as JD Sports sells online across the UK, reductions in demand in any single town have little impact on its overall performance
Global markets broaden demand but add exchange-rate risk
E.g. BrewDog’s recent US expansion boosted sales but a strong pound has made its UK-made beer seem expensive overseas
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