Competition in the real world

Presented by:65- Mukul

75- Prashant Verma85- Salman Azizi

95- Shakeel Siddique105- Tahaa Lokhandwala

115- Yusuf

Competition in economics is a term that encompasses the notion of individuals and firms striving for a greater share of a market to sell or buy goods and services

What is competition ?

Monopoly - A situation in which a single company owns all or nearly all of the market for a given type of product or services

Oligopoly - An oligopoly is a market form in which a market or industry is dominated by a small number of sellers

Perfect Competition - In economic theory, perfect competition describes markets such that no participants are large enough to have the market power or price of a homogeneous product

Types of competition

Leading authority on company strategy and the competitiveness

Developed a 5 force model for industry analysis & business strategy

It focuses on the forces close to the co. that hampers its customer service & profit

Michael Porter

5 Forces Model

Existing loyalty to major brands Incentives for using a particular buyer High fixed costs Scarcity of resources Brand equity Capital requirements

Threat of New Entrants

There are very few suppliers of a particular product

There are no substitutes The product is extremely important to the

buyer, they cannot do without it The supplying industry has a higher

profitability than the buying industry Threat of forward integration by suppliers

relative to the threat of backward integration by firms

Power of Suppliers

Small number of buyers

Purchases of large volumes

Switching to another (competitive) product is simple

The product is not extremely important to the buyer, they can do without it for a period of time.

Customers are price sensitive

Power of Buyers/ Customers

Buyer propensity to substitute

Relative price performance of substitutes

Buyer switching costs

Perceived level of product differentiation

Fad and fashion

Technology change and product innovation

Availability of Substitutes

PURE AND PERFECT COMPITITION

SALIENT FEATURESLarge numbers of undifferentiated buyers and sellers.Each competitor offers or seeks exactly a similar things as do the others.Commodity bought and sold is well organized.There are many competitors acting independently.Market price must be flexible over a period of time.No obstacle to the entry or withdrawal of the firms.Equal excess to production techniques.No patents ,proprietary designs or special skills.

GOVERNMENT INTERVENTION IN PRICE FIXING

1) Attempts to fix prices above an equilibrium level Minimum wage legislation and price support policies.

2) Set maximum prices below equilibrium level.

EFFECTS OF TIME UPON SUPPLY

Important to discuss supply change overtime.

Method of analysis used by marshall .

He suggested three periods of time-Market periodShort periodLong period

THE FIRM IN PURE COMPETITION

Firm has to production and sales policies to the given market price.

In pure competition marginal revenue = average revenue.

Greater the quantity sold greater the revenue .

THE FIRM AND SHUTDOWN POINT

At any price lower than the lowest variable cost per unit , the firm will have to shut down

Decision to operate at loss or shut down and why should continue in losses?

Price = average variable cost - just recovery of total variable cost shut down

Price < average variable - fail to recover its variable cost – shut down

CONSEQUENCES OF PURE COMPETITION

1. Market price is less than cost of production of a particular producer, he can do nothing but to take a loss.

if the price remains below his cost of production for a sufficiently long period, he has no alternative but to go out of business.

2. Increases profit by selling more units.

3. Products subject to competitive market situation face a greater of price instability than is the case with differentiated products.

4. No useful purpose is served by advertising.

Monopoly

The word monopoly is derived from the Greek word MONOS POLIAN

He is a single seller in the market who has complete control over the entire market supply

There are no close substitute for the product

There are entry barrier This sole seller in the market is called the

monopolist

What is Monopoly

Monopolist is the single producer in the market

There are no closely competitive substitute There is complete absence of competition A monopolist is a price maker and not a

price taker Monopoly firm itself being an industry faces

downward sloping demand curve A pure monopolist has no immediate rival

Feature of Monopoly firms

Factors Monopoly competition

Perfect competition

Price Higher Lower

Output Limits It To Maximize Profit

Optimum

Profit Super Normal Profit

Normal Profit

A Comparison

Monopolist exercises the market power by restricting supplies

Consumers choice is restricted

Absence of efficiency

Disadvantages Of Monopoly

Large financial resources

Savings in expenditure

Monopoly is essential in public utility sector

Advantages Of Monopoly

INDIAN RAILWAYS

BEST BUS SERVICE IN MUMBAI

Example Of Monopoly

What is Monopolistic Competition? Monopolistic competition is a market structure

in which:◦ There are a large number of firms◦ The products produced by the different firms

are differentiated◦ Entry and exit occur easily◦ Entering firms/competitors produce close

substitutes

Monopolistic Competition

The four distinguishing characteristics of monopolistic competition are:◦ Many sellers.◦ Differentiated products.◦ Multiple dimensions of competition.◦ Easy entry of new firms in the long run.

Characteristics

When there are many sellers, they do not take into account rivals’ reactions.

Modest changes in the output or price of any single firm will have no perceptible influence on the sales of any other firm.

The relative independence of monopolist competitors means that they don’t have to worry about retaliatory responses to every price or output change.

Many Sellers

Product differentiation gives monopolistic competition its monopolistic aspect.

Differentiation exists so long as advertising convinces buyers that it exists.

Each firm has a distinct identity – a brand image. Consumers perceive its output to be somewhat

different than others in the industry. monopolistic competitors establish brand loyalty.

Differentiated Products

gives producers greater control over the price of their products.

makes the demand curve facing the firm less price-elastic.

implies that consumers shun substitute goods even when they are cheaper.

Brand loyalty.

One dimension of competition is product differentiation.

Another is competing on perceived quality.

Competitive advertising is another.

Others include service and distribution outlets.

Multiple Dimensions of Competition

There are no significant barriers to entry.

Barriers to entry prevent competitive pressures.

Ease of entry limits long-run profit.

Easy Entry

What is Oligopoly??

It is market dominated by small number of sellers (oligopolist)

Each oligopolist is aware of the actions of others

The decision of one firm is influenced by the other

OLIGOPOLY

Jagdish Seth & Rajendra Sisodia The magic number 3 70-90% of market share

Rule of 3

Small number of large firms

Barriers to Entry

Interdependence

Rigid Prices

Mergers

Collusion

CHARACTERISTICS/ BEHAVIOUR

KINKED DEMAND CURVE

Inefficiency

Innovation

GOOD AND BAD OF OLIGOPOLY

A single firm sets industry price

The remaining firms charge the same price as the leader.

Some oligopolistic markets operate in a situation of price leadership

PRICE LEADERSHIP.

Price Leadership can arise due to following circumstances:

1.Lower Cost and Enough Financial Resources

2.Substantial Share Of the Market

3. Initiative

4. Aggressive Pricing