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5 Major Factors Influencing Competition

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Last updated date: 17th Apr 2024
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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


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 Influencing Competition

1. Explain the disadvantages of Perfect Competition.

The main drawback of perfect competition is the ideal market structure. It is just a hypothetical or theoretical concept in economics. In the real world, it is negligible. Sellers cannot add value to their products because adding value or features does not increase the price. Prices are completely determined and controlled by the system of supply and demand. Therefore, the seller's cost increases, but the turnover stays the same. High competition is another disadvantage for sellers due to low barriers to entry and high degrees of freedom to enter and exit. This means that new players may enter the market at any time and offer similar products or services to consumers at similar prices. Existing providers always have an advantage over new providers because they are established in the market and have already built up their credibility. 

2. What do you mean by competitive equilibrium?

Competitive equilibrium is the concept that profit-maximising producers and utility-maximising consumers reach equilibrium prices in a competitive market where prices are freely determined. At the equilibrium price, the quantity supplied is equal to the total quantity demanded. This means that a fair deal has been reached between the supplier and the buyer. Here, the market is balanced because all suppliers were matched with buyers willing to buy exactly the quantity the supplier wanted to sell.


Competitive equilibrium has many uses in predicting both price and overall quality in a particular market. It can also be used to estimate each individual's consumption and each firm's total production within the market. Furthermore, through the concept of competitive equilibrium, it is possible to evaluate specific government actions and events and determine whether they move the market towards or away from competitive equilibrium.

3. What do you mean by Imperfect Competition?

Imperfect competition is a competitive market situation with many sellers selling heterogeneous (different) goods, as opposed to a perfectly competitive market scenario. As the name suggests, an inherently imperfect competitive market.  Imperfect competition is real-world competition. Today, some industries and vendors are following him for extra profits. In this market scenario, sellers enjoy the luxury of influencing prices and increasing profits. When sellers sell non-identical goods in the market, they can raise their prices and make a profit. High profits attract other sellers to enter the market, and losing sellers can exit the market very easily.