Part 2

MARKET PLACE COMPETITION

By Francis Wachira

DIFFERENT MARKET SCENARIOS

When you are in equilibrium with your customer , he/she getting their need satisfied while your company enjoys exclusive sales and huge profits, one would probably wish that that could go on forever . This seldom happens, for other people see what you are doing and decide they can do it better. When they come from a position where they have nothing, they will often be prepared to make less because to them less is more.

MONOPOLIES AND MONOPSONIES

MONOPSONY- A market situation with many sellers but only one (a few) buyers MONOPOLY- A market situation with many buyers but only one (a few) sellers

MONOPOLY

Perfect monopoly faces no direct competition and can therefore impose its will on consumers. Most monopolies become very inefficient and may collapse if exposed to competition. In practice, the monopoly situation is rarely sustainable and soon develops to an oligopoly before sliding onto perfect competition. Conventionally any company controlling 25% or more of a national market can be regarded as a monopoly. You may also have localized monopoly where a certain village, town et cetera have only one dominant player

Factors That Lead to Monopolies

1. Legislative where the laws prevent other entrants e.g. KPLC , TELKOM, POSTA etc 2. Coercive where someone powerful uses force and other non-judicial methods e.g. mafia, mungiki, politicians etc 3. Intellectual or Exclusive rights where a product has no near substitutes and is patented, copyrighted or protected by any other means, or where only one company has a unique formulae 4. Source when one company controls the only viable source of a key raw material including a human resource with unique knowledge e.g. a neuro-surgeon, scientist etc 5. Marketing Companies with superior marketing including promotional capacities can develop into monopolies

DEALING WITH A MONOPOLY

Avoid open combat, you strategies must be of the guerilla kind. One option is to come up with a close me too product Another option is to introduce competition on the generic level Lobby governments to change laws or. Lobby the opposition in the hope that if they win they could reverse restrictive legislation Lobby for strict adherence of the antimonopolies act.

Examples of monopolies
Kenya Revenue Authority Nairobi Stock Exchange Daily Nation

Davis & Shirtliff

Yana Tyres

Kenya Power& Lighting Co.

OLIGOPOLIES

OLIGOPOLY market with few sellers, many buyers. OLIGOPSONY market with few buyers and many sellers

DUOPOLY two dominant players

In a classic oligopoly 4 companies control about 50% of the market without any one company having more than 25%

Features of an Oligopolistic Market

i. There are few players who know each other well ii. They compete on price and quality iii. Product decisions are mainly focused on the tangible and augmented product. iv. Most oligopolies avoid price reduction to avoid a price war that could be suicidal. v. There is a big temptation to contact competitors and form a cartel to fix prices. (cartels are illegal as they hurt consumers) vi. In the long run, oligopolies are not stable, they move towards perfect competition or monopolies through merges and acquisitions.

COURNOTS MODEL
Cournots model shows that the demand curve in an oligopolistic market is kinked. When one company increases its prices, the others do not follow leading to consumers switching to others and therefore an elastic reaction. Conversely, if one company reduces their prices, the others follow suit immediately with no significant consumer switching the sales remain the same. In elastic reaction equilibrium is where the kink is.

Price

Otty

Price Wars

In a price war, the competitors try to out do one another in price. If they keep on reducing both will be wiped out of business

The Natural Spa

A person discovered a natural spa on their farm and started charging one hundred bob to people interested in bathing in the spa. Business was brisk for some time until his bitter rival and neighbour also discovered a similar spa and advertised it at eighty shillings. Angry, the original spa started charging sixty shillings. The new spa went down to forty; the original went down to twenty. Finally the new spa in the spint of nothing invested, nothing lost declared entry to his spa FREE!

Dealing with Competition in an Oligopolistic Model

1) Quality of product, the core, the actual and the augmented. 2) Place, promotion variables 3) Innovation. Creating new products 4) Diversification

PERFECT COMPETITION
Monopolies and oligopolies in the absence of undue intervention should gradually slide into perfect competition

PRE-REQUISITES FOR PERFECT COMPETITION

ATOMICITY- many small players whose actions have no significant impact on the market. Market chooses the price. HOMOGENITY- all forms sell an identical or perfectly substitute product. PERFECT & COMPLETE information- you know everything the other firms do. EQUAL ACCESS- to supplies, finance, technology etc FREE ENTRY- no barriers to entry NO CARTELS or collusion- each business unit acts independently. Consumers aim to maximize utility while sellers aim to maximize profit

PROFITABILITY.

In perfect competition, any abnormal profits can not be sustained. Prices gradually drop to a equilibrium point within a given time and geographical area. There is a high level of movement within companies folding up and new ones trying to come in. Those who are able to survive usually become Hardened

DEALING WITH COMPETITION IN A PC MODEL.

Augmented product Customer service, post sales follow up. Location Ideal? Rent vs returns? Opening, closing hours Product variety Backward, forward integration Above the line promotion Below the line promotion The ability to do a lot of promotion is usually limited to the fact that margins are not very high.