What are Business Markets?
Everyone talks about business markets and being in them. But what are they actually talking about?
In this post we will look at the different types of competition that make up the different business markets, the different interactions within these markets and how a business' 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 does this mean?
First let's look at perfect competition, what is it? In perfect competition there are multiple businesses 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 produce 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, supermarket comparison, if there are two supermarkets in a town offering the same oven chips (not taking in to account quality differences), the one priced at £3 a bag and the other priced at £5 a bag, then 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 trait is that there is perfect information. Perfect information is when there is knowledge of price, utility, 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.
Now that's covered, let's look at 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. Competitive markets will form under certain conditions.
Now you know what a competitive market is, let's look at the different types of businesses 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 similar device from China or an Android phone, but if you specifically want an iPhone you have to go to Apple for it.
Monopolistic competition is where many businesses 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 again use technology as an example of this where Apple iOS and Google Android dominate smartphone operating systems, while computer operating systems are overshadowed by Apple iOS and Microsoft Windows.1
A monopsony is a market 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.
Now I know what they are, how do businesses interact within them?
In a world of perfect competition the interactions occur as many customers buying products from many different, small, suppliers. In this way, no one business can set the price for the products, sellers and consumers accept the going price.
However, in a world of imperfect competition, every different type of market has it's own ways of interacting.
Monopolies have interactions where all of their consumers purchase a specific product from a specific business. These businesses 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 business. This means that the businesses 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 businesses. These businesses have a high interdependence. This is where they have a dependance on the other businesses around them. Businesses such as 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 business in order to buy a greater range of items. This is usually in the form of one large consumer interacting with many smaller businesses.
I think I'm starting to get it, now how does this affect my organisation's goals?
Different organisation's goals can depend on which market they are operating in.
Goals within the Perfect Competition Market
The primary goals can be: profit maximisation, profitability, sales (value and volume), service level and customer satisfaction. Then there are additional goals which can be: growth eventually leading on to achieving a state of imperfect competition, which can then mean, increasing market share, influencing consumer choice, influencing product price and expanding the product range.
Goals within the Imperfect Competition Market
The primary goals can be: profit maximisation, profitability, sales (value and volume), growth, internationalisation, increased market share, market power, satisfying stakeholders, large return on capital employed (ROCE), service level, customer satisfaction 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 business?
Your business 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 business stands in the grand scheme of things. Your business 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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