Business strategy and pricing (Part 2)

ACCA P3考試：Business strategy and pricing

Competition

There are four main types of market, each giving rise to a particular type of competition:

• Perfect competition. This form of market consists of many small suppliers and customers none of which can influence the market. There is free entry and exit from the market and all supply identical products. Here, suppliers must charge the market price. They cannot charge more because, as the products are identical, every customer would move to cheaper suppliers; there is no point in reducing their prices because all output can be sold at the market price. It is worth noting that the internet has tended to make price and competition much more transparent and that there are sites which specialise in comparing suppliers’ prices.

• Oligopoly. This special type of market consists of a small number of suppliers supplying identical products. An example is found in petrol companies. If a supplier increases prices, the others simply have to maintain theirs to gain market share. If a supplier reduces prices, the others must follow suit to maintain their market share. There is therefore little incentive to reduce prices as competitors will follow.

• Monopoly. In a monopoly market there is only one supplier of a product. The supplier can charge whatever is wished, though demand is likely to vary as a result. This is the great freedom a monopolist has: choose the price to charge so that profits can be maximised. Note that despite that statement, being a monopolist does not guarantee that a profit is made. You might be the sole supplier of something no one wants.

• Monopolistic competition. This is a very unhelpful, almost self-contradictory term for the type of market this represents. This form of competition means that there are a number of suppliers supplying similar but not identical goods. Essentially, the products are being differentiated in some way and, therefore, can command different prices. Suppliers are competing, but with different offerings.

Price competition means that consumers are motivated primarily by price and usually suppliers will have to offer low prices to succeed. Very often organisations which use a cost leadership strategy adopt price competition. Their products are ordinary, but because their costs are

very low (if not actually the lowest) prices can also be kept down.

Many laptop producers use price competition because, for most, their products have been commoditised: they all do the same things, with the same operating systems, run the same application software and have similar reliabilities.