Operating in Competitive Markets (AQA GCSE Business)

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Markets & Competition

  • A market exists where one entity has a product to sell to another entity who wishes to purchase it, resulting in trade

  • Markets can exist in a variety of forms:

    • Global and international markets exist where buyers and sellers trade across national boundaries

      • E.g. The market for fast food is international

    • National markets exist where buyers from the same country engage in trade

      • E.g. The market for Stilton cheese is national

    • Local markets exist where buyers and sellers are in close proximity to each other

      • E.g. The market for driving lessons tends to be local

  • The market, alongside factors such as costs and promotional activity, determines the price of products

The Nature of Competition

  • Competition exists when there is more than one business supplying goods to consumers in a market

Diagram: Types of Competition

Markets can have different levels of competition, from little or none (monopoly) to many (imperfect competition)

Markets can have different levels of competition, from little or none (monopoly) to many (imperfect competition)

Monopoly markets

  • In a small number of markets, one business meets all consumer demand

    • This is called a monopoly market

  • In the UK, these markets have often emerged as a result of privatisation, where public sector monopolies were transferred to private ownership in the 1980s

    • Examples include water supply and waste treatment, as well as some transport services, including ferry services to remote Scottish islands

Oligopoly markets

  • In an oligopoly, a few large businesses dominate the market

    • Examples include UK supermarkets, electricity suppliers, and broadband suppliers

    • Most business sectors in the UK are dominated by this type of competition

More perfectly competitive markets

  • In some cases, a large number of small and medium-sized businesses compete to meet market demand

    • This is called perfect competition

    • Examples include restaurants, nail bars, home services such as plumbers

The Impacts of Competition

  • The impact of competition depends on the number of businesses that are attempting to meet demand in the market

Competition in monopoly markets

  • Businesses that operate as the single provider in a market do not need to compete with rivals

  • Monopoly businesses' price policies are controlled by the government, to ensure that they do not overcharge for their services

    • Monopoly businesses can make large profits

    • They do not need to spend money on product innovation, advertising or market research

    • Some monopolies are criticised for their failure to invest in infrastructure whilst rewarding shareholders with large dividends

    • Customers cannot shop around for a better deal

    • If customers need to buy products sold by monopoly businesses, their needs are unlikely be fully met as products are standardised

Competition in oligopoly markets

  • Where a small number of large firms dominate a market, there is often limited price competition

    • Prices are often similar between powerful firms, with large sums spent on promotion to differentiate products

    • Smaller businesses may be able to offer lower prices, but they are likely to struggle to survive

    • Products are quite similar but, often, highly branded to appear different to those of rivals

    • Customers have some choice, but this is often on the basis of quality, product range, accessibility of the business and customer service

    • Product development is a key way to compete in oligopoly markets, with new and improved products helping key brands stand out from rivals and encourage customer loyalty

    • In some oligopoly markets, governments intervene to ensure that no one business becomes too powerful

      • E.g. the UK government blocked the takeover of failing UK supermarket Safeway by market leaders Tesco, ASDA and Sainsburys

Competition in more competitive markets

  • Where many small and medium-sized businesses compete to meet market demand, price competition is likely to be most intense

    • Customers can switch with ease between the many different providers of products

    • Customers have a high level of choice between businesses offering a wide range of unique products

    • Businesses that can afford to do so invest in innovation and product differentiation to build market share

    • Customers can be persuaded to become loyal to businesses through excellent customer service and products that meet their needs closely

Examiner Tip

The key principle to take away from this topic is that, the greater the level of competition, the greater the chance of lower prices for customers, and a greater choice of goods and services in a market.

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