Competition & Competitive Market Processes (AQA A Level Economics)

Short & Long Run Benefits of Competition

• Competitive markets are those with an extremely high degree of competition

  • Competition is based upon the number of firms competing in a market

  • The degree of competition reduces as the market structure moves towards being more of a monopoly

Diagram: The Degree of Competition

The more firms in a market, the higher the level of competition 

• The benefits of competition include price reductions and improved quality as firms strive to gain market share

  • With more sellers in the industry, consumers enjoy a wider choice of goods and services 

The Short- and Long-run Benefits of Competition

Non-price Competition in a Competitive Market

• Firms operating in competitive markets are likely to employ non-price strategies aimed at helping them to secure customer loyalty

  • With so many competitors and substitute products available, building customer loyalty can be difficult

Non-price Competition Strategies 

The Process of Creative Destruction

• The competitive market place leads to a process coined creative destruction by Austrian economist Schumpeter

  • This occurs when the process of innovation and technological change leads to the replacement of old technologies and business models with new ones

• Firms that have a degree of monopoly power and are making large profits will attract other firms into the market

  • In such competitive environments, there's a strong incentive for firms to innovate and overcome barriers to entry to attract consumers

• This drive for innovation has led to significant advancements in technology

  • As firms compete to develop innovative solutions, there is a constant cycle of creation and destruction within industries

  • Existing goods, services, and methods of production are replaced by newer, more efficient ones that satisfy consumer needs 

  • Firms that fail to adapt or innovate risk being made obsolete, leading to their exit from the industry

• E.g In the entertainment market, Netflix responded to changing consumer wants by creating a streaming platform for movies and TV online and eventually creating their own content. Blockbuster (a video rental firm) failed to adapt, which led to them exiting the market