Business Studies | Creating a Business

External influences – markets + competition

There are many outside influences which affect businesses, of which the market is just one.

Size of the market

Businesses are heavily influenced by the markets in which they trade. The size of the market influences businesses: whether it is local, national or international will affect the nature of the product they supply, as well as the number of units.

Degree of competition

Markets also vary in terms of the degree of competition. It is true to say that improved communications and methods of transportation have made markets more competitive. Many UK businesses now face competition from European and Asian producers, as well as domestic rivals. Competition has become even more intense since the giant American retailer Wal-mart made a bid for Asda, and was successful.

What are markets?

A market is a place where buyers and sellers meet to establish prices and to exchange goods and services. Markets can take two main forms:

1)      Traditional, geographical markets

2)      Non – geographical markets

Traditional, geographical markets

Consumers can purchase fresh fruit or vegetables at a local street market. Firms wishing to sell these products can take a stall at the market and expect to meet buyers. Thus, the market brings together buyers and sellers. The same is true of a high street in any town or city. Retailers set up stores in these locations and customers know where to find the shops.

Neo-geographical markets

An increasing range of products are bought and sold without buyers and seller ever meeting. It is possible to purchase books, company shares and groceries on the internet using a credit card. Rail tickets and theatre tickets can be purchased by phone. Businesses purchase oil and foreign currencies over the phone. Modern forms of communication hae replaced face to face communication in traditional markets.

In general, markets do their job efficiently if information on prices and products is available to buyers and sellers.

Classifying markets

Markets can be classified according to the number of firms trading and the degree of competition. This type of categorisation allows the likely effects on the business to be identified and analysed. Three main categories exist:

1)      Perfect competition

2)      Oligopoly

3)      Monopoly

Perfect competition

Perfectly competitive markets have many small firms producing virtually identical products at very similar prices. Firms can enter and leave such markets freely. Firms operating in such markets do not earn excessive profits and use resources with great efficiency.

Oligopoly

A market is said to be oligopolistic when few firms exist and the firms are interdependent in their actions. Oligopolistic firms consider the likely reactions of competitors when considering changing prices of introducing new products. Oligopolistic markets are common and include industries such as chocolate manufacture, television broadcasting and high street banking.

Monopoly

A monopoly exists when only a single producer operates within a market. Examples of UK monopolies might include the Post Office (delivering letters) and Transco – the company responsible for piping gas.