A2 - Business - The relationship between business and the competitive environment

The relationship between business and the competitive environment

Competitive structure of industry - what does this mean?

Economists enjoy giving names to different forms of competitive structure. Hairdressing is classified as being monopolistically competitive. This is because it is highly competitive with many firms, yet they each try to establish a differentiated service that gives them a degree of control over prices. Petrol retailing is an example of what economists call an oligopoly. Another competitve sturcture is monopoly - a single supplier. For example, London Transport is a monopoly provider of underground trains in London - but it does face competition form other transport providers.

Why is competitive structure important?

The number of competing firms in an industry, their strength and the ease of entry for new firms have an impact on:

• the amount of choice for consumers
• the level of competition in terms of price, promotion, new product developments
• the profitability of businesses in the industry
• the likelihood of illegal collusive agreementss - arrangements between firms to limit open competition between them.

Changes in the competitive structure

New competitors

The entry of new firms into the industry increases competition. The airline industry is notable for increased competition in recent years. Until the 1980s, the global airline industry outside the US was dominated by national 'flag carriers' that were often state owned. Governments imposed significant restrictions on the entry of new firms into the industry and on the routes that non-flag carriers could operate. The industry was heavily regulated and the entry of new firms was rare. Over the last 20 years, the EU amrket has followed the US down the road of deregulation. Nationalised flag carriers have been privatised to be run as profit-seeking businesses. The EU has made subsidies to national airlines illegal and enforced an 'open skies' policy on all member states to alow any operator from any EU country to fly within and between all member states. Entry barriers fell and many new low cost airlines spearheaded by Ryanair and Easyjet - have been established and expanded repidly. Examples of strategies adopted by the traditional airlines in reponse to increased competition:

• integration, for example, Air France with KLM and Lufthansa with Swissair
• new routes and new services, for example flat beds, showers and message facilities in first class
• cost cutting, for example BA has outsourced its ticketing administration to India
• better branding - focusing on the service differences with the low cost carriers.

Dominant businesses

The existence of a main and dominant business can have a huge impact on the nature or level of competition in a market. The lack of big competitors often means that:

• there is less choice for consumers
• the dominant firm may charge higher prices than would exist in a more competitive market
• it will take any action it can to maintain its dominant position.

Microsoft is a classic example of a dominant firm. It has over 90% market share of computer operating systems. It has been accused of using this monopoly…