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3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
3 Industry Market analysis and Cost Models
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3 Industry Market analysis and Cost Models

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  • Types of Market
    Definition
    A place where the forces of demand and supply meet.
    The meeting and interaction of buyers and sellers.
    In general a market will physically exist in one place e.g. cattle market, car auction, shop, and supermarket. However, many markets are amorphous i.e. they are formless and are not centred in any one place, e.g. the market for foreign currency.
    Such markets have grown rapidly recently and have become common place due to the growth of computers and technology in the buying and selling of goods and services.
    In economic theory four markets exist. Generally referred to as the forms of competition. Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly
    It is possible to categorise or classify any real world organisation under one of these headings.
    Perfect Competition
    The classical form of competition. The most intense form of competition.
    For a market to be perfect it must display a number of characteristics.
    A large number of small buyers and sellers, no one firm is large enough to dominate the market and influence price, firms are price takers and have no control over it.
    Freedom of entry into the industry and freedom of exit out of the industry. There are no barriers stopping firms entering or leaving the industry.
    Homogeneity of the products, each set of products sold are identical, there are no differences between them (real or imagined) and there is an absence of advertising and product differentiation.
    Perfect knowledge exists, consumers are aware of all the products on offer and all the prices being asked.
    Perfect mobility of the factors of production, factors can freely and quickly move from job to job and place to place.
    At the ruling market price any amount produced by the firm can be sold.
    In the real world, few (if any) of these characteristics actually exist. There are some examples which are fairly good examples (although not good examples).
    A small guest house
    The market for shares
    The foreign exchange market
    The commodity markets
    Small garage service/repair outlets
    Auctions
    Monopolistic Competition
    A form of competition similar to perfect competition. The major differences are that products are not homogeneous and there is some product differentiation i.e. there is advertising, branding, etc. Products are heterogeneous. Thus although there are many sellers (as in perfect competition) each firm enjoys some monopoly power although they are all in competition.
    Oligopoly
    A small number of very large producers which dominate the market. There may be many firms in the market, but a small number of large firms dominate it. A classic example is petrol retailing. Several outcomes are possible. An oligopolist can be shown to have a kinked demand curve as price reductions are matched by rivals whilst increases are not. Price stability may therefore result. This could however be achieved at monopoly levels of price and output if the oligopolists can agree to act as a cartel and thus maximise joint profits.
    Alternatively, price wars may develop as the lowest cost oligopolist attempts to bankrupt the others and gain their market share by driving down the price.
    Finally, competition may tend to be in non-price areas such as advertising, ‘free’ gimmicks and product updates. This may result in higher prices and more rapid market obsolescence of products.
    Example
    If A reduces its price, B, C and D may retaliate and cut their prices. Therefore, there is no gain in market share for firm A.
    Management and marketing decisions centre on assessing what their competitor’s reactions might be.
    In addition, because the products are similar, advertising and promotion are vital, as well as packaging, distribution, branding, labelling, design and image.
    Price is thus not of great significance in the buying decision. This is a common form of competition in the real world. It may be the most common, e.g. bank services, cigarettes, petrol, detergents, chocolate, alcohol, cars.
    Monopoly
    In theory a form of competition where there is only one seller or producer. There is no competition and the producer has control over the market.
    In practise the Office of Fair Trading defines a monopoly as having 25% or more of the market.
    It is possible to control selling price or output, but not both.
    In the private sector there are arguably no examples of a ‘pure’ monopoly. However, there are many examples of monopoly power e.g. Visa, De Beers, and Sky. If a monopoly is considered too powerful it may be controlled by the government and legislated against.
    In the past in the public sector there were many state controlled monopolies e.g. British Steel. One reason for public ownership was to protect the consumer against possible private sector exploitation e.g. exploiting their monopoly position by charging high prices.
    In recent years many public sector organisations (e.g. Post Office) have been privatised. It could be argued that some of them are now private sector monopolies e.g. BT and British Gas. The power of the monopolist comes mainly from the ability to keep out new entrants and thus prevent other firms taking their profits away.
    Entry Barriers
    Capital size, technological ignorance, legal (public sector), economies of scale, historical, contrived (collusion), branding/labelling, take-over, geographical/natural, patents, copyrights, trademarks, immobility of the factors of production.
    The Traditional Economic Markets
    There are 4 of these:
    1. Perfect Competition
    The best form of competition for the consumer
    Features:
    There are a large number of small buyers and sellers. No
    one bus can influence the price. All Bus’s are price takers.
    Freedom of entry into the market and freedom of exit as
    well. There are no barriers stopping new bus’s entering the
    market (contrast this with monopoly)
    Homogeneity of the products. Each set of products are
    identical. There are no differences between them (real or
    imagined). There is an absence of advertising and product
    differentiation.
    Perfect knowledge. All the consumers are fully aware of
    all the products on offer and their prices.
    Perfect mobility of resources. All the resources (labour,
    capital, land, raw materials, the entrepreneur) can move
    freely /quickly from job to job and place to place.
    This is clearly a rare form of competition. However, there are some approximations to it e.g. newsagents, greengrocers, guest houses, some Internet trading.
    The consumer benefits from:
    Plenty of choice
    Advertising not confusing them (because there isn’t any)
    Not being charged excessive prices
    2. Monopolistic Competition
    This is very similar to PC. Major difference is that product
    Differentiation exists i.e. there is heterogeneity of products. This means there is advertising and the use of brand names.
    Each bus in such a market would have some monopoly power e.g. they can differentiate their products from their competitors via advertising and USP’s (e.g. image, quality, service, design, colour, packaging).
    As a result they may be able to get away with price rises and have some ability to be price makers (but not much)
    This is closer to the real world than PC e.g. small garages, small retail shops and builders.
    Not as good for the consumer as PC because there is advertising and the ability of some bus’s to charge a higher price than the others.
    3. Oligopoly
    This is where a small number of very large and powerful bus’s dominate a market. The vast majority of the sales are concentrated in just a few bus’s e.g. petrol retailing, banking, cigarettes, ice cream, mass produced car production, frozen foods, crisps, chocolate, washing powder, beer sales, food supermarkets. It is very common in the UK.
    Features:
    Little price competition
    Much non-price competition (quality, after sales service,
    design etc)
    Extensive product differentiation (branding, image creation)
    The use of USP’s e.g. choice, range and location of outlets
    A good deal of product heterogeneity via advertising
    Price competition is rare as this can lead to price wars. Here each bus must reduce price in response to each others price cuts.
    No one bus gains, only the consumer, which is not the objective!
    Some oligopolists will combine together and try to control the market. They will form a cartel. Here they agree not to really compete with each other. They may share the market out amongst themselves or agree to fix prices.
    In the UK this is illegal. Bus’s would be investigated by the Competition Commission and may be prosecuted.
    A good way of identifying an oligopoly is to see if the prices charged by the bus’s are the same or very similar. Another way is to use concentration ratios.
    e.g. the sales or market share of the top 3 bus’s in a market are measured. The higher the figure the more likely an oligopoly will be operating.
    The leading (largest) bus in an oligopoly market is usually the price maker e.g. BP with petrol. The other smaller bus’s will then follow suit. They are price takers.
    4. Monopoly
    This is where there is only one supplier in a market i.e. a pure monopoly.
    The gov’s definition is where one bus has a 25% share of the market. The OFT can then decide to have the bus investigated by the Competition Commission if it is found that they are acting against the public (consumer) interest
    The CC can also investigate (and refuse) proposed mergers/takeovers, which may result in a monopoly being formed.
    Examples of monopolies in the UK?
    Kelloggs
    Sky
    Visa
    Unilever
    Features of Monopoly:
    Charge high prices (is a price maker)
    Uses differential pricing
    Restricts production and keeps supply off the market
    (pushing prices up)
    Extremely powerful e.g. bulk buys stock and can undercut
    any potential rival bus’s
    Takes over or merges with potential rivals before they
    become a threat
    Keeps out potential rival bus’s via entry barriers
    It is the entry barriers that give the monopolist the power
    Types of entry barriers
    Capital size/global operations
    Technological ignorance
    Patent/copyright
    Sole ownership of sources of raw materials (natural monopolies)
    Historical
    Economies of scale
    Geographical
    Legal
    The Gov’s Attitude
    It aims to promote competition e.g. via the Competition Commission. It seeks to prevent bus’s acting against the public interest
    But it needs to encourage bus’s to grow and compete domestically and internationally. If not the UK will be dominated by overseas global multinationals e.g. Ford, MacDonald’s.
  • Types of Market
    Definition
    A place where the forces of demand and supply meet.
    The meeting and interaction of buyers and sellers.
    In general a market will physically exist in one place e.g. cattle market, car auction, shop, and supermarket. However, many markets are amorphous i.e. they are formless and are not centred in any one place, e.g. the market for foreign currency.
    Such markets have grown rapidly recently and have become common place due to the growth of computers and technology in the buying and selling of goods and services.
    In economic theory four markets exist. Generally referred to as the forms of competition. Perfect Competition, Monopolistic
    Competition, Oligopoly and Monopoly
    It is possible to categorise or classify any real world organisation under one of these headings.
    Perfect Competition
    The classical form of competition. The most intense form of competition.
    For a market to be perfect it must display a number of characteristics.
    A large number of small buyers and sellers, no one firm is large enough to dominate the market and influence price, firms are price takers and have no control over it.
    Freedom of entry into the industry and freedom of exit out of the industry. There are no barriers stopping firms entering or leaving the industry.
    Homogeneity of the products, each set of products sold are identical, there are no differences between them (real or imagined) and there is an absence of advertising and product differentiation.
    Perfect knowledge exists, consumers are aware of all the products on offer and all the prices being asked.
    Perfect mobility of the factors of production, factors can freely and quickly move from job to job and place to place.
    At the ruling market price any amount produced by the firm can be sold.
    In the real world, few (if any) of these characteristics actually exist. There are some examples which are fairly good examples (although not good examples).
    A small guest house
    The market for shares
    The foreign exchange market
    The commodity markets
    Small garage service/repair outlets
    Auctions
    Monopolistic Competition
    A form of competition similar to perfect competition. The major differences are that products are not homogeneous and there is some product differentiation i.e. there is advertising, branding, etc. Products are heterogeneous. Thus although there are many sellers (as in perfect competition) each firm enjoys some monopoly power although they are all in competition.
    Oligopoly
    A small number of very large producers which dominate the market. There may be many firms in the market, but a small number of large firms dominate it. A classic example is petrol retailing. Several outcomes are possible. An oligopolist can be shown to have a kinked demand curve as price reductions are matched by rivals whilst increases are not. Price stability may therefore result. This could however be achieved at monopoly levels of price and output if the oligopolists can agree to act as a cartel and thus maximise joint profits.
    Alternatively, price wars may develop as the lowest cost oligopolist attempts to bankrupt the others and gain their market share by driving down the price.
    Finally, competition may tend to be in non-price areas such as advertising, ‘free’ gimmicks and product updates. This may result in higher prices and more rapid market obsolescence of products.
    Example
    If A reduces its price, B, C and D may retaliate and cut their prices. Therefore, there is no gain in market share for firm A.
    Management and marketing decisions centre on assessing what their competitor’s reactions might be.
    In addition, because the products are similar, advertising and promotion are vital, as well as packaging, distribution, branding, labelling, design and image.
    Price is thus not of great significance in the buying decision. This is a common form of competition in the real world. It may be the most common, e.g. bank services, cigarettes, petrol, detergents, chocolate, alcohol, cars.
    Monopoly
    In theory a form of competition where there is only one seller or producer. There is no competition and the producer has control over the market.
    In practise the Office of Fair Trading defines a monopoly as having 25% or more of the market.
    It is possible to control selling price or output, but not both.
    In the private sector there are arguably no examples of a ‘pure’ monopoly. However, there are many examples of monopoly power e.g. Visa, De Beers, and Sky. If a monopoly is considered too powerful it may be controlled by the government and legislated against.
    In the past in the public sector there were many state controlled monopolies e.g. British Steel. One reason for public ownership was to protect the consumer against possible private sector exploitation e.g. exploiting their monopoly position by charging high prices.
    In recent years many public sector organisations (e.g. Post Office) have been privatised. It could be argued that some of them are now private sector monopolies e.g. BT and British Gas. The power of the monopolist comes mainly from the ability to keep out new entrants and thus prevent other firms taking their profits away.
    Entry Barriers
    Capital size, technological ignorance, legal (public sector), economies of scale, historical, contrived (collusion), branding/labelling, take-over, geographical/natural, patents, copyrights, trademarks, immobility of the factors of production.
    The Traditional Economic Markets
    There are 4 of these:
    1. Perfect Competition
    The best form of competition for the consumer
    Features:
    There are a large number of small buyers and sellers. No
    one bus can influence the price. All Bus’s are price takers.
    Freedom of entry into the market and freedom of exit as
    well. There are no barriers stopping new bus’s entering the
    market (contrast this with monopoly)
    Homogeneity of the products. Each set of products are
    identical. There are no differences between them (real or
    imagined). There is an absence of advertising and product
    differentiation.
    Perfect knowledge. All the consumers are fully aware of
    all the products on offer and their prices.
    Perfect mobility of resources. All the resources (labour,
    capital, land, raw materials, the entrepreneur) can move
    freely /quickly from job to job and place to place.
    This is clearly a rare form of competition. However, there are some approximations to it e.g. newsagents, greengrocers, guest houses, some Internet trading.
    The consumer benefits from:
    Plenty of choice
    Advertising not confusing them (because there isn’t any)
    Not being charged excessive prices
    2. Monopolistic Competition
    This is very similar to PC. Major difference is that product
    Differentiation exists i.e. there is heterogeneity of products. This means there is advertising and the use of brand names.
    Each bus in such a market would have some monopoly power e.g. they can differentiate their products from their competitors via advertising and USP’s (e.g. image, quality, service, design, colour, packaging).
    As a result they may be able to get away with price rises and have some ability to be price makers (but not much)
    This is closer to the real world than PC e.g. small garages, small retail shops and builders.
    Not as good for the consumer as PC because there is advertising and the ability of some bus’s to charge a higher price than the others.
    3. Oligopoly
    This is where a small number of very large and powerful bus’s dominate a market. The vast majority of the sales are concentrated in just a few bus’s e.g. petrol retailing, banking, cigarettes, ice cream, mass produced car production, frozen foods, crisps, chocolate, washing powder, beer sales, food supermarkets. It is very common in the UK.
    Features:
    Little price competition
    Much non-price competition (quality, after sales service,
    design etc)
    Extensive product differentiation (branding, image creation)
    The use of USP’s e.g. choice, range and location of outlets
    A good deal of product heterogeneity via advertising
    Price competition is rare as this can lead to price wars. Here each bus must reduce price in response to each others price cuts.
    No one bus gains, only the consumer, which is not the objective!
    Some oligopolists will combine together and try to control the market. They will form a cartel. Here they agree not to really compete with each other. They may share the market out amongst themselves or agree to fix prices.
    In the UK this is illegal. Bus’s would be investigated by the Competition Commission and may be prosecuted.
    A good way of identifying an oligopoly is to see if the prices charged by the bus’s are the same or very similar. Another way is to use concentration ratios.
    e.g. the sales or market share of the top 3 bus’s in a market are measured. The higher the figure the more likely an oligopoly will be operating.
    The leading (largest) bus in an oligopoly market is usually the price maker e.g. BP with petrol. The other smaller bus’s will then follow suit. They are price takers.
    4. Monopoly
    This is where there is only one supplier in a market i.e. a pure monopoly.
    The gov’s definition is where one bus has a 25% share of the market. The OFT can then decide to have the bus investigated by the Competition Commission if it is found that they are acting against the public (consumer) interest
    The CC can also investigate (and refuse) proposed mergers/takeovers, which may result in a monopoly being formed.
    Examples of monopolies in the UK?
    Kelloggs
    Sky
    Visa
    Unilever
    Features of Monopoly:
    Charge high prices (is a price maker)
    Uses differential pricing
    Restricts production and keeps supply off the market
    (pushing prices up)
    Extremely powerful e.g. bulk buys stock and can undercut
    any potential rival bus’s
    Takes over or merges with potential rivals before they
    become a threat
    Keeps out potential rival bus’s via entry barriers
    It is the entry barriers that give the monopolist the power
    Types of entry barriers
    Capital size/global operations
    Technological ignorance
    Patent/copyright
    Sole ownership of sources of raw materials (natural monopolies)
    Historical
    Economies of scale
    Geographical
    Legal
    The Gov’s Attitude
    It aims to promote competition e.g. via the Competition Commission. It seeks to prevent bus’s acting against the public interest
    But it needs to encourage bus’s to grow and compete domestically and internationally. If not the UK will be dominated by overseas global multinationals e.g. Ford, MacDonald’s.
  • Transcript

    1. INDUSTRY/MARKET ANALYSIS FIRMS WILL ONLY SUCCEED IF THEY EFFECTIVELY ANALYSE THEIR COMPETITORS MUST FOLLOW THIS WITH AGGRESSIVE STRATEGIES
    2. SUSTAINABLE COMPETITIVE ADVANTAGE   1. 2. 3. 4. THE REASON FOR COMPETITOR ANALYSIS COMPETITIVE ADVANTAGE PRICE PRODUCT RANGE QUALITY SERVICE LEVELS………………
    3. COMPETITIVE ADVANTAGE MUST BE DEEPLY EMBEDDED IN THE FIRM OVER TIME  RESOURCES  SKILLS  CULTURE  INVESTMENT IT’S A DYNAMIC PROCESS NOT A STATIC
    4. SOURCES OF COMPETITIVE ADVANTAGE       LOW UNIT COST DIFFERENTIATIO N NICHE MARKETS PERFORMANCE QUALITY SERVICE     VERTICAL INTEGRATION SYNERGY TECHNOLOGY CULTURE & LEADERSHIP
    5. PORTER AGAIN CONCENTRATES ON THREE KEY FACTORS 1. COST LEADERSHIP UNIT COSTS KEPT AS LOW AS POSSIBLE WITHOUT REDUCING PRODUCT QUALITY ACHIEVED BY  economies of scale  better training  more investment in technology
    6. PORTER 2. DIFFERENTIATION   MAKING PRODUCTS AS UNIQUE AS POSSIBLE (USP’s) e.g. via product quality, customer service THIS DIFFERENTIATES THEM IN THE CUSTOMERS MIND FROM THE OTHER FIRMS IN THE MARKET
    7. PORTER 3. FOCUS STRATEGY   FOCUSSING THE MARKETING MIX ON A SPECIFIC SEGMENT OF THE MARKET buyer group NOT GOING FOR THE MARKET IN GENERAL BUT A PARTICULAR PART OF IT e.g. Primark, Ryanair, Travel Lodge
    8. ASSESSING THE DEGREE OF COMPETITION    PORTERS FIVE FORCES (previous presentation) THE DEGREE OF CONCENTRATION OF FIRMS IN THE MARKET THE RANGE OF AGGRESSIVE STRATEGIES OF COMPETITORS IN THE MARKET
    9. DEGREE OF CONCENTRATION   LIES BETWEEN TWO EXTREMES i.e. perfect competition and monopoly ADD TO THIS – CONTESTABLE MARKETS
    10. CONTESTABLE MARKETS  WHAT IS A CONTESTABLE MARKET? (BAUMOL – 1982) A MARKET WHERE THERE IS THE THREAT OF COMPETITION  WHERE THE BARRIERS TO ENTRY COULD BE OVERCOME 
    11. FEATURES OF CONTESTABILITY ENTRY COSTS ARE LOW  EXIT COSTS ARE LOW  ENTRY & EXIT CAN BE MADE SPEEDILY  SUNK COSTS  HIT & RUN TACTICS 
    12. CONTESTABLE MARKETS WHERE CONTESTABILITY EXISTS THERE WILL BE MORE COMPETITION  AS EXISTING FIRMS WILL FEAR THE THREAT OF NEW FIRMS  THEY WILL BEHAVE MORE COMPETITIVELY 
    13. THE EFFECT LOWER PRICES  HIGHER QUALITY  MORE EFFICIENCY  LOWER PROFITS  CONTESTABILITY IS POSSIBLE IF THE BARRIERS CAN BE
    14. THE RELEVANCE OF THE GOVERNMENT KEY FACTOR INFLUENCING A FIRMS COMPETITIVENESS 1. TAX POLICY 2. MONETARY POLICY 3. SUBSIDIES, GRANTS, SUPPORT & HELP 4. CONTRACTS 5. LEGISLATION 6. COMPETITION POLICY 7. INTERVENTION & BUREAUCRACY
    15. THE INTERNATIONAL ENVIRONMENT MUST ALSO BE ANALYSED DUE TO  MULTINATIONALS & GLOBAL FIRMS  GLOBAL ECONOMIC, SOCIAL, TECHNOLOGICAL & POLITICAL CHANGE
    16. KEY INTERNATIONAL ISSUES       LOW WAGE ECONOMIES OUTSOURCING TERRORISM/WAR/CRIME RESOURCE ACQUISITION e.g. raw materials DEVELOPING COUNTRIES ENLARGEMENT OF THE EU     EUROPEAN UNION STRATEGY e.g. the Euro TECHNOLOGICAL ADVANCEMENT TRADE ISSUES GLOBAL BRANDING
    17. COST MODELS DIAGRAMS FOR KEY MARKET FORMS (see accompanying text under this slide:17)
    18. PERFECT COMPETITION P mc ac mr ac Q q1
    19. OLIGOPOLY p mc d mr q
    20. MONOPOLY mc ac p a c mr q d
    21. PRICING     PERFECT – ALL ARE PRICE TAKERS MONOPOLISTIC – SOME PRICE MAKERS (via product diff) MOST ARE PRICE TAKERS OLIGOPOLY – PRICE MATCHING & USUALLY A LEADER (price maker) OTHERS ARE PRICE TAKERS MONOPOLY – PRICE MAKER USES DIFF PRICING DUE TO PED DIFFERENTIALS & ABILITY TO SEPARATE MARKETS

    ×