In this assignment I will identify the structure of markets within the economy and explain how they deviate from the model of perfect competition. I will also expand on which market forces dominate the market place, identifying the organisational responses to demand including the adoption of competitive strategies within the free market. Finally I will explain the role of the competition commission and regulatory bodies. Market Types The most important factor within any market is the number of rivals competing for a share of the business.
Competition, as described by Stigler, G (2008) arises whenever two or more parties strive for something that all cannot obtain. Perfect competition is seen as a theoretical ideal and sets the standard for comparison. “Perfect competition exists when a market has many buyers and sellers of the same good. Few markets are perfectly competitive because barriers keep companies from entering or leaving the market easily” (O’Sullivan and Sheffrin, 2007). Perfect Competition is normally unattainable in practice and is often used as a comparative tool by economists to evaluate different markets.
In terms of competitive nature, we can classify real world organisations under the following headings, Monopoly, Monopsony, Oligopoly, duopoly and Monopolistic Competition. Monopoly In the UK, a business controlling 25% of the market is considered a monopoly. According to Stigler, G (2008) a monopoly is “an enterprise that is the only seller of a good or service”. In order for a true monopoly to arise, a company must hold a significant advantage, imposing barriers for entry to prevent others from entering the same market. Holding key resources and patents can make it difficult for another company to break into a market.
It is now rare to see true monopolistic organisations, particularly in the private sector however there are some publically owned services that can be categorised as monopolies. In an effort to prevent monopolistic control over markets certain laws have been passed. The fair trading act of 1973 appoints a director general who investigates unfair trade practices and monitors the effects of mergers that may put a company in a monopolistic position. Monopsony If there is only one buyer for a product then the market is described as monopsonistic in nature, making the supplier wholly reliant on the purchaser.
This can result in pressures from the buyer to reduce the purchase price in an effort to increase the product profit margins. Oligopoly Similar to monopoly, an oligopoly is made up of a small number of large suppliers, all of whom monitor the price of their product closely in an effort to ensure that they do not over or under charge. An organisations failure to manage its prices effectively could result in a loss of the majority, but not all, of its sales. As with monopolies, an oligopoly can only remain as such if it imposes significant barriers to entry.
Duopoly. As with oligopoly, duopoly is the description given to a market where two companies act as the supplier of a homogenous good. Both firms must consider the result of any change in prices. Collusion is rare; instead the use of strategic planning dictates how the company will compete with the other. Monopolistic Competition The closest many organisations come to achieving perfect competition is when their activities result in monopolistic competition. There are many buyers within this kind or market, entry and exit into the market is easy and prices are clearly visible to all.
In order to distinguish between perfect competition and monopolistic competition one must note that the products provided under perfect competition are identical; under monopolistic competition they are differentiated. Product preference dictates the sale of the good over price resulting in several non-price actions being necessary to differentiate the products. An example of a good sold under this type of market would be a breakfast cereal as the consumer has the choice to substitute one for another based on their personal taste. Market forces Market forces are primarily concerned with the supply of and demand for goods nd services within the free market. The demand for a good can be influenced by many factors such as price, available substitutes and a person’s income. Price can be one of the primary forces when looking at the demand for a product, it does however have limitations. Demand may not necessarily rise if the price drops below a certain level, people will automatically assume an inferior product and not purchase it. Similarly if a product that is essential to the consumer is priced higher the demand may not decrease, petrol is a good example of this.
In order for us to predict how much someone is willing to buy at a given price, we must first create a demand schedule, which can be represented as a demand curve. (Fig 1. ) Fig 1. It is apparent that as the price of an item increases, the quantity demanded reduces. This is an over simplification as there are many non price factors affecting demand. The Ceteris paribus clause can best used to describe this method of analysis. Non price factors affecting demand Product substitution occurs when the demand for one product affects the demand of another.
Although price can influence peoples decision to buy a substitute, personal taste, brand loyalty and demography can influence decisions often more persuasively than price. People’s income can also affect their purchasing habits, often increasing their ability to purchase more of a favoured product. The demand for a product will not necessarily rise as a result of a rise in income, quite the contrary; some inferior products may be substituted for more luxury items resulting in an increase in demand for one at the expense of another.
Income is a particularly important factor during times of financial pressure such as a recession, as people often choose to substitute items of higher expense with a cheaper alternative. Organisation responses In response to consumer demand for products an organisation must seek to supply goods at a price that consumers are willing to pay. The supply of a product depends largely on the price at which it can be sold. A product that is priced at a high level may attract new businesses into the market, pushing production up and increasing supply. Higher prices may however put consumers off purchasing, which would reduce demand.
To combat this, the producer may enter into a price war with its competition in an effort to entice consumers back into the market. This action is particularly apparent during times of recession as rivals are continually competing to satisfy the need for lower priced goods. Production costs can also affect the supply of a good dramatically as it influences the sale price of a product. Globalisation has had an affect on production costs due to some countries being able to produce a good at a lower cost, thus allowing them to gain a foothold in markets where the cost of production is unsustainable.
Clothing for instance is one example of a good that, although can be produced in the UK, is cheaper to outsource from countries such as China due to the lower overheads associated with production. “China however, has become the leading world producer and supplier of clothing – currently generating almost 13 percent of the world supply” (ILO, 1996) Similar to a demand curve, we can draw a supply curve to better analyse the trends associated with market supply. (Fig 2. ) Fig 2. In opposition to a demand curve, the supply curve slopes upward from left to right, showing that higher prices increase production of a good.
Eventually, as demand and supply level off, the market will reach a state of equilibrium. We can represent a state of equilibrium using the following graph. (Fig 3. ) Fig 3. Competitive strategy Organisations that operate outside of a wholly monopolistic environment are tasked with developing strategies that can be used to gain the upper hand against their rivals, relying primarily on the price, quality and nature of there product to gain the advantage. Adopting a cost leadership strategy an organisation aims to produce its product for the lowest cost allowing it to compete on price with all other producers in the market.
According Stahl, M and Grigsby, D (1997) the cost development strategy implies that the use of economies of scale is integral in achieving cost leadership. Larger scale production is one way of keeping costs to a minimum, allowing for greater levels of profit. A differentiation strategy puts forward the idea that competitive advantage can be gained through the characteristics of a producer’s product or brand. Changing a products appearance for instance, although purely cosmetic, may alter consumer’s perception of that product and add artificial value without the need to improve quality.
Effective branding can also be achieved through well thought out and hard hitting advertising. The use of market segmentation allows for a more focused cost or differentiation strategy. By concentrating on a smaller geographical area or by specialising in a limited number of products an organisation can keep its costs to a minimum. An organisation may also market its products to separate groups of people through the use of differentiation, promoting luxury goods for instance to those more inclined to pay an inflated price on the basis of receiving a ‘superior’ product.
Competition Commission and Regulating Bodies The Competition Commission, an independent public body established by the competition act 1998, relies on input from authorities such as the OFT (Office of Fair Trading) in order to carry out inquiries into mergers, markets and the regulation of major regulated industries ensuring healthy competition between companies in the UK for the benefit of companies, customers and the economy (competition commission n. d. ).
The OFT is tasked with ensuring that markets work well for consumers, ensuring business is conducted fairly and with vigorous competition. The OFT is granted powers to carry out its work under consumer and competition legislation and has three main operational area’s. Competition Enforcement (CE) is concerned with controlling competition between organisations whilst enforcing the competition act. Consumer Regulation Enforcement (CRE) ensures consumer legislation is properly enforced and encourages codes of practice and standards.
Markets and Policies Initiatives (MPI) offers statistical advice and financial analysis as well as conducting market investigations, it also holds relations with stakeholders including government departments. Some privatised organisations such as utility suppliers, no longer under the control of the government, are free to operate in the free market with no competition. In an effort to represent the interests of consumers regulatory bodies are set up to oversee the activities of privatised organisations.
An example of such an organisation would be Ofgem whose primary duty is to “Promote choice and value for all gas and electricity customers”. Conclusion The behaviour of an organisation with its environment is dictated largely by the market forces of supply and demand. We can see that these market forces shape the way an organisation does business. The use of competitive strategies allows for healthy and legal competition between organisations. In order to prevent illegal activities regulatory bodies and the Competition commission enforce legislation within the market.