The products sold are a close substitute for each other.
Barriers to entry will be low.
Businesses have little control over prices.
Uncompetitive markets:
A monopoly exists if there is a single supplier of a product in the market.
Why might the UK government monitor the activities of a monopoly? Click on the logo:
Car production would be an example.
High barriers to entry.
Firms try to exploit economies of scale.
Businesses tend not to compete on the basis of price.
Why?
They are concerned about the possibility of a 'price war'.
Traditionally oligopolistic businesses have engaged in 'non price competition'.
The changing competitive environment:
Some industries have got more competitive such as retailing in the UK.
Why do think this is the case?
In some industries 'consolidation' has occured through mergers and takeovers such as the airline business.
Sainsbury's planning to merge with Asda:
Details here.
The impact on business of a changing competitive environment:
Details here.
The impact on business of a changing competitive environment:
New entrants such as online retailers.
New products such as Peer to Peer (P2P) lending websites.
Consolidation reduces competition.
Porter's Five Forces:
Michael Porter outlined five factors which determine the profitability of an industry.
When the business can benefit from the collective strength of these five forces it can receive above average returns.
When the business can benefit from the collective strength of these five forces it can receive above average returns.
1. The bargaining power of suppliers.
The more power a supplier has over its customers, the higher the prices it can charge.
How could a business reduce the power of suppliers?
Taking over a supplier company (backward integration).
Seek out alternative sources of supply.
Taking over a supplier company (backward integration).
Seek out alternative sources of supply.
2. The bargaining power of buyers.
Buyers want to obtain supplies at the lowest possible price.
If customers have considerable market power it can limit profitability.
How could a business reduce the power of customers?
Technical limitations e.g. games consoles only playing one type of game.
If customers have considerable market power it can limit profitability.
How could a business reduce the power of customers?
Technical limitations e.g. games consoles only playing one type of game.
3. Threat of new entrants.
If businesses can easily come into an industry it becomes difficult for existing businesses to charge high prices.
Businesses try to limit competition through patents or building a strong brand.
4.Substitutes.
The more substitutes there are for a product the more competitive the market.
How could a business reduce the possibility of substitute products?
Investment in research and development to prevent substitute products being developed.
Buying rival businesses.
5. Rivalry among existing firms.
The higher the level of competition in an industry the more difficult it is to charge higher prices.
Cartels and other anti competitive activities can reduce this rivalry.
This would be illegal under UK & EU law.
More on Porters 5 forces here.
Even more on Porter's 5 Forces here.
