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Competition Among Businesses.  Business competition influences the price, quality, and quantity of ALL the retail products YOU purchase in the marketplace.

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Presentation on theme: "Competition Among Businesses.  Business competition influences the price, quality, and quantity of ALL the retail products YOU purchase in the marketplace."— Presentation transcript:

1 Competition Among Businesses

2  Business competition influences the price, quality, and quantity of ALL the retail products YOU purchase in the marketplace  The number of firms in the market and their size determine the prices you pay as a consumer AND the quality of the products you are provided

3  Market structure: a set of conditions that describes the characteristics of a market in which a business firm competes  4 major characteristics:  Number of firms  Ability of a business to set product price  Product differentiation  Ease of entry into a market  4 major market structures:  Perfect competition  Monopolistic competition  Oligopoly  monopoly

4  Perfect competition: market structure in which a large number of firms all produce an identical product  Many sellers: hundreds or more businesses produce the same product and each business supplies only a small fraction of the entire market’s production  No ONE business can influence the market price for the product by changing production levels because there are so many sellers  Identical goods or services: one producer’s product is indistinguishable from another’s  Only reason to buy one product rather than the other is price difference  Complete information exists: buyers and sellers know all there is to know about the product and its price  Also know about the competitor’s products  Free entry: sellers can enter or leave the market whenever they wish with relatively SMALL costs  SUCCESSFUL businesses in perfectly competitive markets MUST TAKE or ACCEPT, the PRICE DETERMINED by the MARKET and decide HOW MUCH TO PRODUCE at that price

5  Monopoly: opposite of a perfectly competitive market  Pure monopoly: a market structure with only ONE SELLER in the market  No close substitutes: No other firm offers a similar product  Barriers to entry: potential rivals are unable to enter a market because of LEGAL RESTRICTIONS or HIGH INVESTMENT COSTS

6  Legal monopolies:  Natural monopolies: telephone, electric, and water companies  Often called public utilities  Markets regulated by government  Determine the services the utilities provide and how much they are permitted to charge  Government licenses: grants a particular business the right to operate without direct competition  Patents as monopolies: gives the inventor the private property right to a new product or idea for 17 years  Copyrights and trademarks: through the Federal Copyright Office, the government gives the authors of original writing and artistic work a copyright  A special monopoly for the lifetime of the author, plus 50 years  Trademarks: special designs, names, or symbols that identify a product, service, or company

7  Monopolistic competition: a market structure with many firms that offer similar but not identical products  Also called: imperfect competition  Many firms in this type of competition  Each firm can raise or lower its price to alter its sales  Differentiated products: emphasize distinctive features of their products to differentiate them from competitors’ products  Describe their products: “new and improved”, “used by professionals”, or “the best value for the lowest price”  Customer service: special services that businesses provide to attract you as a customer  Warranties and support: will convince you to buy one product rather than another  Prestige: use highly visible labels to differentiate their products  People who purchase a popular brand of sunglasses are often interested in more than simply protecting their eyes from the sun  Good EXAMPLES of monopolistic competition:  Clothing and restaurant industries  Relatively easy to enter or exit these markets BUT competition is INTENSE, and businesses must work hard to create a special demand for their products

8  Oligopoly: a market structure in which a few large businesses supply most or all products in a market  Examples: cereals, major appliances, carbonated soft drinks  Has a HIGH CONCENTRATION RATIO  Concentration ratio: percentage of industry’s sales accounted for by its four largest firms; for Oligopoly the percentage is 60% or MORE  Businesses in Oligopoly are able to adjust their prices  If one company reduces its price, the others are likely to reduce prices to keep their customers  As a result, all companies may end up with lowers prices and earnings

9  Restricting competition: strong temptation to restrict price competition so they all can earn higher profits  Collusion: an agreement in which companies restrict production to raise prices and profits  May result from an explicit agreement among companies, or it can occur in unspoken understandings that businesses will behave in certain ways  One form of collusion: PRICE FIXING  Price fixing: all firms in a market agree to charge the same or similar prices

10  Obstacles to successful collusion:  Price  Production cuts  Law enforcement  The potential of new companies entering the industry  Companies in an oligopoly must agree on how much higher the price should be than it would be in a competitive market  Companies with lower production costs may want smaller price increases than those with higher costs  Companies must agree on the amount by which each will reduce production  Cutting back on production reduces sales  Each company wants the others to bear the brunt of cutting back production = leaving one company to sell more at the higher price  IF collusion is SUCCESSFUL in raising the price, the higher price will attract new companies into the industry  In the U.S. it is against the law – SHERMAN ANTITRUST ACT – to restrain trade, so the LAW presents the greatest obstacle to COLLUSION

11  Business firms expand in two ways:  Internally: expand their activities by adding facilities, equipment, and personnel based on current or predicted demand  Externally: require mergers  Merger: occurs when one business buys another  Following a merger, the acquired firm is either dissolved or becomes a division of the new firm  Another term for merger: “buyout”  Reasons for merging:  Add new products, gain access to established markets, and/or to diversify their business therefore, “spreading the risk”  Benefits of increased size  Eliminate a competitor  Reduce costs by acquiring assets like marketing or transportation facilities

12  Vertical: combination of two or more companies involved in different steps of a production process  Horizontal: combination of two or more companies engaged in the same business  Can increase an industry’s concentration ratio by eliminating a competitor  Conglomerate: combines two or more unrelated companies under single management  Allows the company to diversify the range of products it sells so that if one product does not sell well, the entire company will not fail  Instead of merging, some firms in an oligopoly establish joint ventures with other companies  Joint Ventures: two companies keep their independence while cooperating on a particular project  Allows companies to combine resources without experiencing many of the problems of mergers

13  Marketing: everything that takes place between production and purchase  Differentiate their products  Establish competitive prices  Develop effective promotions  See that products are available when and where consumers want them  Figure 11-4 pg. 193 (IMPORTANT) The Major Marketing Functions

14  Product: must be the one consumers want, features and quality consumers expect for the price they pay  Questions researchers ask:  Value most?  Quality standards expected?  Services desired?  Price: search for the price that enables them to earn the most profit  Price must cover fixed costs and variable costs  Uses these costs to compute break-even point – the point of production at which income from sales equals total fixed and total variable costs  If total variable and fixed costs are not met = company will have a loss  If costs are below total and variable costs = company will make a profit

15  Promotion: the way that business get their messages to consumers  Advertising, direct mail, personal contact  If consumers don’t know about a product, they won’t buy it  Place: for a product to be useful, it has to be in a place when and where consumers will buy it  Do not think of place as a specific location…internet, mail order catalogs

16  Two kinds of advertising:  Informational: tells potential customers about product characteristics and prices  Low-cost means of helping customers make informed decisions about the choices among competing products  Argued that it reduces customer search time and reduces their personal costs in comparing product characteristics and prices  Persuasive: convince you to buy the product for a specific reason (even if it is not always the truth)  Two concerns by economists:  Often based on extravagant claims that confuse potential customers and insult their intelligence  Tends to reduce competition and limit the number of firms that are able to compete in a market  Perfect competition: no difference in the product that businesses sells, so there should be no need to advertise  Monopoly: only one seller and that seller should not need to advertise because it has no competition  Monopolistic competition: extensive advertising  ULTIMATE GOAL OF MARKETING:  Determine what buyers want  To inform  To persuade

17  Steel industry  Aluminum  Film  Television  Cell phone  Gas

18  There is a single seller.  There are no close substitutes for the firm’s product.  There are barriers to entry.  Public utilities such as gas, electric, water, cable TV, and local telephone service companies, professional sports teams

19  Monopolistically competitive markets have the following characteristics:  There are many producers and many consumers in the market, and no business has total control over the market price.  Consumers perceive that there are non-price differences among the competitors' products.  There are few barriers to entry and exit  Producers have a degree of control over price.

20 Matching: 1. E 2. D 3. G 4. A 5. H 6. B 7. F 8. C Multiple Choice 1. A 2. D 3. C 4. B 5. A 6. B 7. D 8. D 9. C 10. C 11. B 12. B 13. D 14. D

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