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

2. Copyright © 2002 by Harcourt, Inc. All rights reserved.  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 competition 3. State the 4 models of market competition by giving some examples 4. State under what conditions a business might be unable to influence its price 5. Explain Porter’s five forces LEARNING GOALS

3. Copyright © 2002 by Harcourt, Inc. All rights reserved.  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 Business -Competition and market

4. Copyright © 2002 by Harcourt, Inc. All rights reserved. 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 Business -Competition and market

5. Copyright © 2002 by Harcourt, Inc. All rights reserved. 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 Business -Degrees of competition

6. Copyright © 2002 by Harcourt, Inc. All rights reserved. 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’… Competition and Business -Degrees of competition

7. Copyright © 2002 by Harcourt, Inc. All rights reserved. There are four models of market structure: 1. Perfect competition 2. Monopoly 3. Monopolistic competition 4. Oligopoly Competition and Business - Four models of market structure or competition

8. Copyright © 2002 by Harcourt, Inc. All rights reserved. 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 © PhotoDisc Competition and Business -Degrees of competition

9. Copyright © 2002 by Harcourt, Inc. All rights reserved.  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 Competition and Business -Degrees of competition

10. Copyright © 2002 by Harcourt, Inc. All rights reserved.  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 Competition and Business -Degrees of competition Monopolistic competition

11. Copyright © 2002 by Harcourt, Inc. All rights reserved.  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 © PhotoDisc Competition and Business -Degrees of competition

12. Copyright © 2002 by Harcourt, Inc. All rights reserved. Types of Competition

13. Copyright © 2002 by Harcourt, Inc. All rights reserved. Table 7-3 Advantages and disadvantages of oligopoly competition Advantages of oligopolyDisadvantages 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 Competition and Business -Degrees of competition

14. Copyright © 2002 by Harcourt, Inc. All rights reserved. Question for your critical thinking: List as many Chinese businesses belonging to oligopoly market structure as possible within five minutes: Competition and Business -Degrees of competition

15. Copyright © 2002 by Harcourt, Inc. All rights reserved.  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 Business - Porter’s five forces analysis

16. Copyright © 2002 by Harcourt, Inc. All rights reserved. Five forcesSome 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 competition More 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 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 Porter’s five forces model