Economics: Types of Competition

Study Notes

The Competitive Arena

Organisations need to differentiate themselves from competitors in the market due to well-informed consumers and intense rivalry from new entrants.

Industry Structure

Industry structure refers to the number and size of competitors in an industry.
Michael Porter's five forces model explains competition in an industry, which includes:
- The threat of new entrants
- The bargaining power of suppliers
- The bargaining power of customers
- The threat of substitute products
- Rivalry among existing competitors

Porter's Five Forces Model

The threat of new entrants depends on:
- Prevailing barriers to entry (low or high)
- Reaction of existing competitors that entrants can expect (low or high barriers)
Sources of barriers to entry:
- Supply-side economies of scale
- Demand-side economies of scale
- Customer switching costs
- Capital requirements
- Incumbency advantages
- Unequal access to distribution channels
- Restrictive government policy
The bargaining power of suppliers is influenced by the number of suppliers in the industry.
The bargaining power of customers is influenced by the availability of alternative choices.
The threat of substitute products is influenced by the number of competing businesses that offer substitute products.
Rivalry among existing competitors is influenced by the intensity of competition in the industry.

Analysing Key Competitors

Understanding current competitors involves analysing market size, growth, and profitability, as well as their strengths and weaknesses.
Understanding potential competitors involves identifying organizations with low barriers to entry, such as those with necessary technology, market access, strong brand, or operating knowledge and skills.

Competitive Positions

According to the Arthur D. Little (ADL) model, organisations can occupy one of the five competitive positions:
- Dominant: Strong technological leadership or monopoly
- Strong: Sufficient access to resources and capabilities
- Favourable: Exploitable strengths and better opportunities
- Tenable: Vulnerable, performing just satisfactorily
- Weak: Unsatisfactory performance, inefficient, and ineffective

Description

Understand the different types of economic competition, including monopoly, monopolistic competition, oligopoly, and pure competition. Learn how organisations differentiate themselves in a competitive market.