Market Competition (AQA A Level Business): Revision Note

Degrees of competition

• Every business operates within a competitive environment, and the nature of that competition shapes the decisions it makes about pricing, marketing and strategy

• Understanding market conditions - how competitive a market is, how rivals behave and whether the market is growing - is essential for effective business planning

The nature of competition

• Competition exists when there is more than one business supplying goods to consumers in a market

Types of competition

Monopoly markets

• In monopoly markets, one business meets all consumer demand

• In the UK, these markets have often emerged as a result of privatisation, where public sector monopolies were transferred to private ownership in the 1980s

  • Examples include water supply and waste treatment, as well as some transport services, including ferry services to remote Scottish islands

Competition in monopoly markets

• Businesses that operate as the single provider in a market do not need to compete with rivals

• Monopoly businesses' price policies are controlled by the government, to ensure that they do not overcharge for their services

  • Monopoly businesses can make large profits

  • They do not need to spend money on product innovation, advertising or market research

  • Some monopolies are criticised for their failure to invest in infrastructure, whilst rewarding shareholders with large dividends

  • Customers cannot shop around for a better deal

  • If customers need to buy products sold by monopoly businesses, their needs are unlikely to be fully met, as products are standardised

Oligopoly markets

• In an oligopoly, a few large businesses dominate the market

  • Examples include UK supermarkets, electricity suppliers and broadband suppliers

  • Most business sectors in the UK are dominated by this type of competition

Competition in oligopoly markets

• Where a small number of large firms dominate a market, there is often limited price competition

  • Prices are often similar between powerful firms, with large sums spent on promotion to differentiate products

  • Smaller businesses may be able to offer lower prices, but they are likely to struggle to survive

  • Products are quite similar but, often, highly branded to appear different to those of rivals

  • Customers have some choice, but this is often based on quality, product range, accessibility of the business and customer service

  • Product development is a key way to compete in oligopoly markets, with new and improved products helping key brands stand out from rivals and encourage customer loyalty

  • In some oligopoly markets, governments intervene to ensure that no one business becomes too powerful

    • E.g. the UK government blocked the takeover of failing UK supermarket Safeway by market leaders Tesco, ASDA and Sainsbury's

More competitive markets

• In some cases, a large number of small and medium-sized businesses compete to meet market demand

  • This is called perfect competition

  • Examples include restaurants, nail bars and home services such as plumbers

Competition in more competitive markets

• Where many small and medium-sized businesses compete to meet market demand, price competition is likely to be most intense

  • Customers can switch with ease between the many different providers of products

  • Customers have a high level of choice between businesses offering a wide range of unique products

  • Businesses that can afford to do so invest in innovation and product differentiation to build market share

  • Customers can be persuaded to become loyal to businesses through excellent customer service and products that meet their needs closely

Competitive behaviour

• Competitive behaviour describes the strategies businesses use to win and retain customers in the face of rivalry

• Businesses in highly competitive markets must monitor rival behaviour constantly and be ready to adapt their strategies quickly

Examples of competitive behaviour

Market growth

• Market growth refers to an increase in the total size of a market over time, measured by sales volume or value

• The rate at which a market is growing has important implications for business strategy:

  • In a fast-growing market, such as electric vehicles or AI software, businesses can increase sales without taking customers from rivals, reducing the pressure to compete aggressively

  • Growing markets tend to attract new entrants, which increases competition over time and may reduce the advantage of early movers

  • In a mature or declining market, such as print newspapers or landline telephones, total sales are flat or falling, so businesses must fight harder for market share

  • A declining market may force businesses to cut costs, diversify or exit altogether

• Monitoring market growth trends helps businesses make important decisions, including:

  • where to invest

  • which products to develop

  • which markets to enter or leave