Competition & Competitive Market Processes (AQA A Level Economics)

• Competitive markets are those with an extremely high degree of competition
  • Competition is based upon the number of firms competing in a market
  • The degree of competition reduces as the market structure moves towards being more of a monopoly

Diagram: The Degree of Competition

The more firms in a market, the higher the level of competition
 

• The benefits of competition include price reductions and improved quality as firms strive to gain market share
  • With more sellers in the industry, consumers enjoy a wider choice of goods and services 

The Short- and Long-run Benefits of Competition

Short-run benefits

Long-run benefits

Lower prices: competition causes firms to immediately lower prices for consumers in an attempt to gain market share   More choice: more sellers equals more choice for consumers    Customer satisfaction: firms compete using non-price competition strategies to gain consumers  E.g After sales services, discounts, 2 for 1 offers, loyalty cards

Sustained lower prices: only the most efficient firms will survive in the long term and will be more allocatively efficient     Technology improvements: Long term competition increases the pace of innovation as firms aim to gain a competitive advantage Eg. Renewable energy or pharmaceutical markets    Long term quality: abnormal profits can be invested into R&D, to continuously innovate and improve the quality of goods/services in order to become recognised in a crowded market

 

• Firms operating in competitive markets are likely to employ non-price strategies aimed at helping them to secure customer loyalty
  • With so many competitors and substitute products available, building customer loyalty can be difficult
     

Non-price Competition Strategies 

Strategy	Explanation
After-sales service	Firms offer ongoing support and assistance post-purchase to differentiate from competitors This improves consumer satisfaction and leads to repeat purchases E.g Technical support
Packaging	Creative and unique packaging distinguishes products and contributes to their unique selling point and consumer appeal E.g Coca-Cola's iconic bottle shape
Corporate Social Responsibility (CSR)	Firms adapt to social and environmental concerns to show their ethical commitment. This can attract socially-conscious consumers E.g H&M conscious campaign
Delivery policies	Firms are increasingly offering improved delivery and return policies to attract consumers
Improved quality	Constant innovation and upgraded features increase sales and maintain competitiveness. E.g Apple's regular release of upgraded iPhones

• The competitive market place leads to a process coined creative destruction by Austrian economist Schumpeter
  • This occurs when the process of innovation and technological change leads to the replacement of old technologies and business models with new ones
     

• Firms that have a degree of monopoly power and are making large profits will attract other firms into the market
  • In such competitive environments, there's a strong incentive for firms to innovate and overcome barriers to entry to attract consumers
     

• This drive for innovation has led to significant advancements in technology
  • As firms compete to develop innovative solutions, there is a constant cycle of creation and destruction within industries
  • Existing goods, services, and methods of production are replaced by newer, more efficient ones that satisfy consumer needs 
  • Firms that fail to adapt or innovate risk being made obsolete, leading to their exit from the industry
     
• E.g In the entertainment market, Netflix responded to changing consumer wants by creating a streaming platform for movies and TV online and eventually creating their own content. Blockbuster (a video rental firm) failed to adapt, which led to them exiting the market