What is Competition?
Competitiveness refers to the capabilities and performance of a firm, subsector, or country and the competitiveness of goods and services in a particular market relative to the capabilities and performance of other firms, subsectors, or countries in the same market. The more choices a product has in a market, the lower the price of the product compared to what it would be if there was no competition (monopoly) or little competition (oligopoly).
Market Power in Different Market Concentrations
1. Perfect Competition
In a competitive market, multiple sellers sell standardised products to multiple buyers. Homogeneous markets have many sellers who enter and leave the market at will. There are no barriers to entry, and companies cannot exceed their 'normal' profits in the long run. Buyers in a perfectly competitive market enjoy complete information about products and services. All products on the market are compatible, so the demand for our products is very flexible. All companies are price takers and have no market power.
Market Structure
2. Monopolistic Competition
Monopolistic competition is a form of imperfect competition in which a small number of sellers dominate the market by differentiating their products through branding and customisation. Because of these characteristics, the products on the market are not perfect substitutes for each other, and sellers can set their prices. Demand becomes elastic as it adapts to. There are barriers to entry, but they can be lowered. Complete information is not available to buyers and sellers. There is an ambiguity that can be exploited by more knowledgeable players. Monopoly market sellers are price setters and have market power.
3. Monopoly
Let's understand which is not a factor influencing competition. Let's start by understanding the meaning of monopoly. In a monopoly, a single company is the sole seller of a particular type of product or service. Products are not simply adapted from another specialised category in the field. Due to product uniqueness, demand is still inelastic, allowing companies to exercise extensive pricing power to generate profits in excess of their 'normal' profits. The industry is characterised by very high barriers to entry as incumbents may be protected by patents, and there is no moving element.
Buyers do not have access to complete information, and in some cases, only sellers can tap into the market through price discrimination. A monopoly enjoys very high, if not absolute, market power. A monopoly exists when a company has a unique product that other companies do not sell because there is no competition. Product diffrentiation which is not a factor influencing competition is considered one of the major characteristics of monopoly.
Factors Influencing Competition
The level of competition in the market depends on many factors of microeconomics, both on the company's side and on the seller's side. Competition can be influenced by five fundamental factors. These are product characteristics, number of sellers, barriers to entry, availability of pricing information, and location. Each factor depends on the availability or desirability of alternative products, and when there are no alternatives and the company is the sole seller of its own product, there is a monopoly and no competition. The competitive factors of microeconomics are discussed below in detail:
1. The number of Buyers and Sellers
The number of buyers and sellers of a commodity in the market indicates their influence on the price of the commodity. Due to a large number of buyers and sellers, no single buyer or seller can influence the price of an item. However, if the seller of the goods is one of hers, then such a seller has a great deal of control over the price. The number of sellers directly affects the number of choices consumers can make. As the number of suppliers selling the same or similar products increases, so does competition. Conversely, if there are fewer sellers, the competitiveness of the industry will decline. In the extreme, single supplier markets have no competition at all, as consumers have no choice where to buy their products.
2. Barriers to Entry
Barriers to entry describe how easy or difficult it is to enter or exit a market. High barriers to entry prevent new entrants from entering the market and keep competition low. On the other hand, when new sellers are free to enter and exit the market, there is less protection for existing sellers and more competition.
3. Availability of Information
Information availability primarily refers to how difficult it is for consumers to find and compare prices. Being able to easily compare offers and prices between competitors increases competition and vice versa. The reason is that lower prices make competing products more attractive, but only if consumers are aware of it.
4. Location
A seller's location can have a significant impact on competition. The greater distance between vendors makes it more difficult for consumers to switch vendors, thus reducing competition. On the other hand, a store or business location can be a competitive advantage if the seller can reach more potential customers.
5. Nature of the Commodity
Product features describe the characteristics of a product that set it apart from others. As products and services become more differentiated, competition in the market tends to decrease and vice versa. This is because unique features reduce product compatibility and reduce the number and desirability of available alternatives. It is much easier for consumers to switch from one product to another if all products look the same (that is, homogeneous).
The Factors Influencing Marketing
The factors influencing marketing are discussed below. Any firm operating under marketing receives signals from the marketplace. That is, detailed information regarding the consumer needs, wants, desires, and the desired backing or supporting parameters. The competition pressure factors are listed below:
It goes without saying that population growth leads to increased demand for goods and services. Market means people with different needs and wants.
The concept of a shared family, with its many benefits, has lost its meaning over the years. Instead of the shared family, we see the divided nuclear family, a product of the Western World. More families mean more products and services are needed.
Younger generations will benefit from changes in culture, lifestyle, and quality of life values that will create new and increasing employment opportunities. This means more income opportunities and increased purchasing power. Increased purchasing power supports needs and desires, which ultimately support purchasing behaviour.
Technological advances are also considered one of the factors influencing marketing. The process of science and technology never ends. One invention or discovery leads to another. Technological progress is so rapid that people are so affected by the wave of planned obsolescence.
One of the major factors influencing the marketing is communication media. People learn about new products and service launches with the onslaught of mass media, the printed audiovisual media accelerating the speed of change and exchange.
Case Study
Explain the role of competition in market success.
Competition is considered an essential part of the market. The competitive process in a market economy exerts a kind of pressure to move resources to where they are most needed and can be used most efficiently for the economy as a whole. However, for the competitive process to work, "it is important that prices clearly indicate costs and benefits." Competition has been shown to be an important indicator of productivity growth within a nation. Competition strengthens product differentiation as companies seek to innovate, attract consumers, increase market share, and increase profits. It helps improve processes and productivity when companies are trying to outperform their competitors with limited resources.
Summary
Competition in Economics is a scenario in which different economic agents compete for receipt of limited goods by varying elements of the marketing mix, such as price, product, advertising, and location. In classical economic thinking, competition drives retailers to develop new products, services, and technologies that offer consumers more choices and better products. A number of competition pressure factors exist which include the number of companies, barriers to entry, information, and availability/accessibility of resources. The number of buyers in the market also affects competition and the price each buyer is willing to pay, which affects the overall demand for the product in the market.
FAQs on 5 Major Factors That Influence Competition in Business
1. What are the 5 major factors that influence competition in a business environment?
The five major factors that directly influence the level of competition in a business environment, as per microeconomic principles, are:
- Number of Buyers and Sellers: A large number of sellers increases competition, while a small number reduces it. A market with a single seller is a monopoly with no competition.
- Barriers to Entry: This refers to how easy or difficult it is for new companies to enter a market. High barriers, such as patents or high startup costs, protect existing firms and keep competition low.
- Product Differentiation: When products are unique or highly branded, competition is reduced because there are fewer direct substitutes. Homogeneous or identical products lead to higher competition.
- Availability of Information: If consumers can easily access information and compare prices between different sellers, competition intensifies. Poor information availability allows sellers to maintain higher prices.
- Location: The geographical proximity of competing businesses impacts competition. Greater distances between sellers can make it more difficult for consumers to switch, thereby reducing direct competition.
2. What is the main difference between perfect competition and a monopoly?
The main difference lies in the number of sellers and their control over price. In perfect competition, there are many sellers offering identical products, and no single firm can influence the market price; they are all 'price takers'. In contrast, a monopoly consists of a single seller of a unique product with no close substitutes. This sole seller has significant control over the price and can set it to maximise profits, acting as a 'price setter'.
3. How do barriers to entry affect the level of competition within an industry?
Barriers to entry act as obstacles that make it difficult for new businesses to enter a market. High barriers to entry, such as high capital requirements, government regulations, or strong patent protections, shield existing companies from new challengers. This results in fewer competitors and lower overall competition. Conversely, low barriers to entry allow new firms to enter the market freely, which increases the number of players and intensifies competition, often leading to lower prices and more innovation.
4. Can you provide a real-world example of how product differentiation reduces competition?
A classic example is the smartphone market. While both Apple's iPhone and Samsung's Galaxy phones perform similar functions, they are highly differentiated. Apple uses its unique operating system (iOS), ecosystem, and brand image to create a loyal customer base. This product differentiation means Apple isn't competing solely on price with Android phones. Customers often choose based on features, brand, and user experience rather than just finding the cheapest option, which effectively reduces direct, price-based competition.
5. Why is the availability of information considered a critical factor influencing competition?
The availability of information is critical because it empowers consumers. When buyers can easily find and compare prices, product features, and reviews, it forces sellers to be more competitive. If information is transparent, a seller cannot easily charge a higher price than a competitor for a similar product because consumers will know and choose the better offer. This transparency creates pressure on firms to innovate, improve quality, and offer fair prices, thus intensifying market competition. Without this information, sellers can exploit consumer ignorance.
6. What are the key characteristics of monopolistic competition?
Monopolistic competition is a market structure defined by several key characteristics:
- Many Sellers: There are numerous firms competing in the market.
- Product Differentiation: Each firm sells a product that is slightly different from its competitors, achieved through branding, quality, or design. This is the most crucial feature.
- Low Barriers to Entry: It is relatively easy for new firms to enter and for existing firms to exit the market.
- Some Control Over Price: Due to product differentiation, sellers have a small degree of control over the price of their specific product.
Examples include restaurants, hairdressing salons, and clothing stores.
7. How does the number of buyers and sellers in a market impact prices?
The number of buyers and sellers directly impacts market prices through the laws of supply and demand. When there are many sellers of a similar product, the supply is high and they must compete for customers, which typically drives prices down. Conversely, if there is only one or a few sellers (an oligopoly or monopoly), they can restrict supply and set higher prices. On the other side, a large number of buyers increases demand, which can push prices up. In a market with many buyers and many sellers, no single individual can influence the price.
