Copyright © 2002 by Harcourt, Inc. All rights reserved. Topic 7 : Competition and Business Lecturer: Zhu Wenzhong.

Copyright © 2002 by Harcourt, Inc. All rights reserved.

Topic 7 :Topic 7 :

Competition and BusinessCompetition and Business

Lecturer: Zhu Wenzhong Lecturer: Zhu Wenzhong


Key learning goals: This topic focuses on the discussion of four types of

market structures or degrees of competition, and the introduction to Porter’s Five Forces model used to analyze market competition.

1. State the definition of competition and the types of market in terms of geographical boundary

2. State the factors that affect the degree of competition3. State the 4 models of market competition by giving some

examples 4. State under what conditions a business might be unable to

influence its price5. Explain Porter’s five forces

LEARNING GOALSLEARNING GOALSLEARNING GOALSLEARNING GOALS


Definition: • Competition means activity in which businesses try to

win in a certain market by defeating others which are trying to do the same. It can be also defined as the battle vying for customers’ acceptance.

• Market refers to any place where selling and buying are exchanged. In the market economy, the prices of products and services will be influenced by demand and supply in the market.

• However, markets can be divided by their geographical boundaries as follows in the table.

Competition and BusinessCompetition and Business -Competition and market-Competition and market


Table 7-1 Types of market in terms of geographical boundaries

Markets Some examples

1) Local markets •The market of houses in Guangzhou city

2) Regional markets •The market of human resources in the South China

3) National markets •The market of computers in China

4) International markets

•The market of foreign exchange in the world.

Competition and BusinessCompetition and Business -Competition and market-Competition and market


The amount of competition in a market may be different according to different market structures.

The degree of competition in a market will affect how prices are determined.

It should be noted that two businesses operating in the same local market, such as two bus companies in the same route, may not necessarily face competition with each other. But competition may come from other means of transport, such as mini buses, taxies or trains.

Competition and BusinessCompetition and Business-Degrees of competition-Degrees of competition


Factors affecting the degree of competition:1. The number of competitors: The number of firms within the market, such as ‘more

competitors may mean higher level of competition’. 2. Substitute products: The extent to which rival products are different, such as ‘more

substitute products may lead to higher degree of competition’.3. Market control: The amount of control on entry within the market, such as

‘easier market entry may mean stronger degree of competition’.

4. Customer knowledge: The degree of customers’ knowledge about the different

products, such as ‘more customer understanding of different products may mean higher degree of competition’…



• There are four models of market structure:

1. Perfect competition 2. Monopoly3. Monopolistic competition4. Oligopoly

Competition and BusinessCompetition and Business --Four models of market structure or competitionFour models of market structure or competition


• A market structure where many buyers and sellers are exchanging similar products in the market and no one seller has any control over the price. China’s open markets in the countryside are closer to this type of the market structure.

• Major characteristics:• Each business has no influence over price.• If a business charges the price higher than others, no

consumers will buy its product.• If a business charges the price lower, it would be

forced out of business. • Advantages: Very competitive market Businesses have to be efficient.• Disadvantages: Businesses are completely controlled by the market. Businesses can only make ‘normal’ profit. Perfect competition can be difficult to find in real

life.

Perfect competition

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Definition: A market structure in which only one single

firm supplies the entire product. There is no direct competition, and there are barriers to entry (regulated by the government). Or: One business has total control over a market and is the only seller of the product so it has strong influence over the price. Examples of this type are China Rail, China Postal Service, China Electricity, etc.

Advantages:• Complete control over the price• ‘abnormal’ profit Disadvantages: • Lack of competition• Little incentive for innovation• Inefficient management

Perfect competition

Monopoly

© PhotoDisc




Definition: A market structure in which a large

number of relatively small firms compete in the market and there is some restriction on competition. Each firm has a product that is similar but differentiated from others. Examples in China are shops, supermarkets or other retailers, etc.

Advantages:• Few barriers to enter the market.• Some incentive for innovation or

differentiation Disadvantages:• One business has only limited control

over the price.

Perfect competition

Monopoly

© PhotoDisc



Monopolistic competition


Definition: A market structure in which

a small number of dominant businesses are providing heavily-branded products with some barriers to entry.

Most businesses today belong to this type of competition, for example, China’s banks, China’s mobile manufacturers, etc.

Perfect competition

Monopoly

Monopolistic competition

Oligopoly

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Types of CompetitionTypes of CompetitionTypes of CompetitionTypes of Competition


Table 7-3 Advantages and disadvantages of oligopoly competition

Advantages of oligopoly Disadvantages of oligopoly

Differentiated products High advertising and promotion costs

Brand loyalty customers Some price wars

Benefiting customers in price wars

Some barriers of entry

Prices are often stable for a long period

‘Black’ or under-the-table arrangements between businesses



Question for your critical thinking:

List as many Chinese businesses belonging to oligopoly market structure as possible within five minutes:



Definition: • A very useful model of describing markets and

determining the degree to which businesses can manage competition within their markets.

• It was introduced by Professor Porter in Harvard University of the United States in 1980. Porter is now very famous researcher or economist in strategic management of business.

Competition and BusinessCompetition and Business --Porter’s five forces analysisPorter’s five forces analysis


Five forces Some affecting factors

1. Rivalry among competitors

The number of competitors – more competitors, less influences of a business Differentiated products – more differentiation, more influence of a business The growth rate of the market – faster growing market, less intense competition

2. The threat of new entrants Easier for market entry, more competitionMore investment on new products, harder for new entry

3. The threat of substitute products

More substitute products from other businesses, more competition, and less influence of a business More differentiation, more chances to win in the market

4. The bargaining power of customers

Stronger power of customers, more competition, weaker influence of a businessMore buyers, stronger influence of a business over the market.

5. The bargaining power of suppliers

More powerful suppliers, more costly for a business to operate in a market More suppliers for a business, greater control of a business over its production (lower price for supplied goods)

Table 7-4 Porter’s five forces model

Copyright © 2002 by Harcourt, Inc. All rights reserved. Topic 7 : Competition and Business Lecturer: Zhu Wenzhong.

Documents

models of market competition

market slide

competition slide

business competition

degrees of competition

market control

definition of competition

market of houses