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Copyright 2002 by Harcourt, Inc. All rights reserved.

Topic 7 :

Competition and Business

Lecturer: Zhu Wenzhong

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Key learning goals:This topic focuses on the discussion of four types ofmarket structures or degrees of competition, and theintroduction to Porters Five Forces model used to analyzemarket competition.

1. State the definition of competition and the types of marketin 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 toinfluence its price

5. Explain Porters five forces

LEARNING GOALS

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Definition: Competition means activity in which businesses try to

win in a certain market by defeating others which aretrying 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 ofproducts and services will be influenced by demand and

supply in the market. However, markets can be divided by their geographicalboundaries as follows in the table.


-Competition and market

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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 marketsThe 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 market

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The amount of competition in a market may bedifferent 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 othermeans of transport, such as mini buses, taxies or trains.


-Degrees of competition

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Factors affecting the degree of competition:1. The number of competitors:

The number of firms within the market, such as morecompetitors may mean higher level of competition.

2. Substitute products:

The extent to which rival products are different, such as moresubstitute products may lead to higher degree of competition.

3. Market control:The amount of control on entry within the market, such aseasier market entry may mean stronger degree of competition.

4. Customer knowledge:The degree of customers knowledge about the differentproducts, such as more customer understanding of differentproducts may mean higher degree of competition



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7/16Copyright 2002 by Harcourt, Inc. All rights reserved.

There are four models of market structure:

1. Perfect competition2. Monopoly3. Monopolistic competition

4. Oligopoly


-Four models of market structure or competition

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A market structure where many buyers and sellersare exchanging similar products in the market andno one seller has any control over the price.Chinas open markets in the countryside are closerto 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

PhotoDisc

Competition and Business-Degrees of competition

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Definition:A market structure in which only one single firmsupplies the entire product. There is no directcompetition, and there are barriers to entry(regulated by the government). Or: One

business has total control over a market and isthe only seller of the product so it has stronginfluence over the price. Examples of this typeare China Rail, China Postal Service, ChinaElectricity, etc.

Advantages: Complete control over the price

abnormal profit Disadvantages: Lack of competition Little incentive for innovation Inefficient management

Perfect competition

Monopoly

PhotoDisc


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Definition:

A market structure in whicha small number of dominant

businesses are providingheavily-branded productswith some barriers to entry.

Most businesses today

belong to this type ofcompetition, for example,Chinas banks, Chinasmobile manufacturers, etc.

Perfect competition

Monopoly

Monopolistic competition

Oligopoly

PhotoDisc


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Types of Competition

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Table 7-3 Advantages and disadvantages of oligopoly competition

Advantages of oligopoly Disadvantages of oligopoly

Differentiated products High advertising andpromotion 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



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Question for your critical thinking:

List as many Chinese businesses belonging to oligopoly

market structure as possible within five minutes:



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Definition:

A very useful model of describing markets anddetermining 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 oreconomist in strategic management of business.


-Porters five forces analysis

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Five forces Some affecting factors

1. Rivalry among competitors

The number of competitorsmore competitors, less influences of abusiness

Differentiated productsmore differentiation, more influence of a

business

The growth rate of the marketfaster 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 ofcustomers

Stronger power of customers, more competition, weaker influence of

a business

More 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 Porters five forces model

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