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S12 IGCSE®/O Level Economics 4.4 Competition  Why do firms compete? Firms compete to: increase their customer base increase their sales expand their market share achieve product superiority enhance their image and the image of their products and ultimately to: incr...

S12 IGCSE®/O Level Economics 4.4 Competition  Why do firms compete? Firms compete to: increase their customer base increase their sales expand their market share achieve product superiority enhance their image and the image of their products and ultimately to: increase profits Competition between firms is good for the consumer. Competition encourages profit-seeking firms to use their resources efficiently to compete on prices and products, so that consumers buy from them  Types of competition Price competition Non-price competition Competing with rival suppliers on product Competing on all other product features other price than price But if demand is price inelastic, revenue will For example, new product development, after- fall; if price is cut below average cost, each sales care, and promotions including unit will be sold at a loss advertising, in-store displays, competitions, etc.  Market structure The characteristics of a market include: how many firms compete to supply it, the degree of competition between them, the extent of their product differentiation, and the ease with which new firms can enter the market to compete with them PERFECT Number of firms supplying market PURE COMPETITION MONOPOLY rising : falling Single large Many suppliers supplier with identical products Individual firms have The monopoly firm no control over can determine market price market price  Perfect Competition This model is based on 4 assumptions: 1. Many buyers and many sellers: each firm is too small to affect the market price, therefore firms are price takers (they must take the market price) 2. Perfect knowledge: all information is available to producers and consumers 3. No barriers of entry/exit: firms can enter and leave markets without restriction 4. Homogenous output: all firms produce identical output, there are no brands, consumers are happy to buy the output of any firm 6 7  Monopoly A single firm or group of firms acting together with sufficient market power to restrict competition and set the market price is a monopoly A pure monopoly controls the total supply of a product to a market A monopoly may restrict supply to force up the market price and earn abnormal/supernormal profits i.e. excess profits above what they would be if there was competition  Problems with monopolies A monopoly may abuse its market power to: Swisscom may be restrict market supply to force up market price fined for overcharging customers restrict competition and consumer choice Regulator promises energy su to ppliers mo end cut product quality to save costs nopoly In addition, there may be: EU investigates IBM over ‘abuse’ of market power x-inefficiency A monopoly may be poorly managed and inefficient because it does not face any competition a need for regulation Governments may have to use resources to investigate and punish abuses of market power  Regulating competition Competition policy refers to measures governments use to control the behaviour of firms acting anti- competitively and against the interests of consumers (1) Regulating the prices of monopolies (2) Imposing fines on firms that abuse their market power (3) Forcing monopolies to break up into smaller, competing firms Consumer protection laws protect consumers from exploitation and harmful business activities, e.g. it is an offence to sell goods or services which are unsafe or in an unsatisfactory condition or to mislead consumers about prices and products  Not all monopolies are bad A firm that is a monopoly may still act competitively and be good for consumers if: It is a more efficient producer with lower costs than smaller firms It invests its profits in new product developments ▲Some revolutionary products, like the jumbo jet and photocopier, may never have been developed if the business organizations that invented them were unable to enjoy monopoly profits. ▲Abnormal profits were a reward for their significant investment risks.  Exam Question 1. Discuss whether the advantages of a monopoly are greater than its disadvantages. (8 marks) 12  ` Paper 22, June 2011 Explain how firms can grow in size. (4 marks) Discuss whether some large firms might benefit from reducing their size. (8 marks) 13 Paper 21, November 2011 Most car producing firms are now very large. Explain how they may have benefited from: (i) horizontal integration (4 marks) (ii) vertical integration (4 marks) 14 Paper 22, November 2011 Discuss whether firms always benefit from growing larger. (8 marks) 15