What are Business Markets?
In this post we will look at the different types of competition that make up the various business markets, the interactions within these markets and how a company's goals can be affected by the market they are in.
The different types of competition
There are two types of competition: Perfect and Imperfect.
What is Perfect Competition?
In perfect competition there are multiple companies offering the same, or very similar products, and even though there are many competitors, none of them are big enough to influence the price of any identical products. An example of this could be farming, where there are multiple farmers all producing the same products but none of them are big enough to set their own price, so they go with a market price which is roughly equal to their competitors.
Also in perfect competition there are a large number of buyers and sellers of the same product, this can mean that the buyers can also influence the price offered. For example, two supermarkets offering the same oven chips (not taking into account quality differences), the one is priced at £3 a bag and the other priced at £5 a bag, the store offering them at the lower price will see more sales. Therefore it is better for them to both offer the product at a relatively similar price in order to get more buyers into the store.
Another aspect of perfect competition is perfect information. This is where there is knowledge of price, quality and production methods of products. This perfect information can then be used in order to assume what another party is thinking, but cannot be used to influence the outcome. An example of perfect information is during a game of chess, both players can see the pieces on the board, both can see the moves available, but neither player is aware of what the other is thinking and neither can accurately predict the next move or the outcome of the game.
What is Imperfect Competition?
This is where there is a market structure where there are some but not all of the features of a competitive market. But what is a competitive market? According to Economics Online:
A competitive market is one in which a large number of producers compete with each other to satisfy the wants and needs of a large number of consumers. In a competitive market no single producer, or group of producers, and no single consumer, or group of consumers, can dictate how the market operates. Nor can they individually determine the price of goods and services, and how much will be exchanged.
Now you know what a competitive market is, let's look at the different types of companies that operate within them.
Monopolies are a specific organisation that is the only supplier of a specific commodity. An example of this is Apple with the iPhone. You can buy a cheaper replica device or an Android phone, but if you specifically want an iPhone you have to go to Apple for it.
Monopolistic Competition is where many companies sell products that are differentiated from each other, but are actually similar. For example, crisp manufacturers all producing different, but similar, flavours (cheese and onion vs. sour cream and onion).
Oligopolies are markets dominated by only a small number of sellers. You can see this in phone and computer operating systems where Apple iOS and Google Android are dominating the phone market and Apple iOS and Microsoft are dominating the computer operating systems.1
Monopsonies are markets in which only one buyer interfaces with many sellers, the buyer then dictates terms to its suppliers, this can also be true with employment. An example using employment can be where there is one employer but many people wanting to work for them, the employer then has the power to set the wages and set how many staff it will be hiring. If the employer was smaller they would not have the power to do this.
How do companies interact within these markets?
In a world of perfect competition the interactions occur as many customers buying products from many different, small, suppliers. In this way, no one company can set the price for the products, with sellers and consumers accepting the going price.
However, in a world of imperfect competition, every different type of market has its own ways of interacting.
Monopolies have interactions where all of their consumers purchase a specific product from a specific company. These companies are then able to set the price of these products.
Monopolistic Competition interacts through having consumers purchasing different products that are similar to those provided by another company. This means that the companies will have to compete for the custom. It also means that the demand for the product will affect the price.
Oligopolies have interactions where consumers are able to buy a small number of items from large companies. These need to be careful about how their actions affect the markets around them.
Monopsonies interact with their clients and allow them to dictate the price of the product they are selling. If there is a high demand for the product the price can go up in order to make more profit, or the price can go down in order to lure the customer into the company. This is usually in the form of one large consumer interacting with many smaller companies.
Let's explore the different goals of these companies
Goals within the Perfect Competition Market
The primary goals can be:
- profit maximisation,
- sales (value and volume),
- service level, and;
- customer satisfaction.
Then there are larger goals which can be: growth eventually leading on to achieving a state of imperfect competition. This can mean the company will have:
- increased market share,
- the ability to influence consumer choice,
- the ability to influence product price, and;
- an expanded product range.
Goals within the Imperfect Competition Market
Some of the goals are the same as those of perfect markets, but some are different, such as:
- increased market share,
- market power,
- satisfying stakeholders,
- large return on capital employed (ROCE), and;
- corporate responsibility such as, ethical issues and staff welfare.
There are additional goals which can be: achieving a state of monopoly, or to join a state of oligopoly.
But what about me and my company?
Your company can depend on what market you are operating in. This information should have helped you to understand the different markets and therefore helped you to understand where your company stands in the grand scheme of things. Your company will always be able to move to the next stage so long as you are aware of what it is.
1. For more information about oligopolies and examples of markets go to Investopedia
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