Unit 8

DISTORTIONS
TO MARKET
COMPETITION

© The McGraw-Hill Companies 2012 1

 OPENING
QUESTION HOW MUCH IS THAT
PETROL?

• You drive along a short stretch of

road where many petrol stations
compete with each other. Their
prices are all the same
• Then you notice that in a different
area, petrol is more expensive and all
petrol stations charge a similarly
higher price.
• Is this evidence of fiercely
competitive markets, or of collusion?
© The McGraw-Hill Companies 2012 2
 CLASS OBJECTIVES
• Understand why perfectly competitive markets
are rarely found in practice
• Identify causes of market imperfection
• Understand the role of brands in creating
imperfect competition
• Appreciate legislative measures designed to
preserve competitive markets

© The McGraw-Hill Companies 2012 3

 LIMITATIONS TO PERFECT
COMPETITION
• Only really applies where production techniques
are simple and opportunities for economies of
scale are few
• Markets often dominated by large buyers
• Naïve to assume that high prices and profits in a
sector will attract new entrants
• Often not complete information available to all
buyers / sellers

© The McGraw-Hill Companies 2012 4

 BRANDING
• A brand is a short-hand description of a bundle of
distinctive service features
• Branding creates a distinct position for a product
offer / organisation
• A brand creates a “unique” product with a market of
its own, and therefore less direct competition
• Distinguish functional and emotional dimensions of
a brand

© The McGraw-Hill Companies 2012 5

 DIFFERENTIATION LEADS TO
BRANDING
• Don’t just sell generic
cola
• Sell branded cola
• Aim to create
uniqueness associated
with the brand
• But buyers must value
this point of
differentiation

© The McGraw-Hill Companies 2012 6

 THINKING
AROUND IF YOU WERE SELLING
THE POTATOES, HOW WOULD
SUBJECT YOU DIFFERENTIATE THEM?
• Sell specially selected potatoes?
• Deliver them to customers’ homes?
• Offer a money back guarantee of
quality?
• Sell prepared /processed potatoes?
• As a result of the above, develop a
strong BRAND IDENTITY

© The McGraw-Hill Companies 2012 7

KEY CHARACTERISTICS OF A BRAND
To be effective, a brand needs the following:
– consistency
– to reduce buyers’ level of perceived risk
– to offer a range of functional and emotional
attributes which are of value to buyers
• Brands have “functional” and “emotional”
dimensions

© The McGraw-Hill Companies 2012 8

 WHY ARE THESE TOP BRANDS SO
SUCCESSFUL?

The world’s top 20 global

brands
Source: Business Week /
Interbrand Top 100 Global
Brands Scoreboard, 2009

© The McGraw-Hill Companies 2012 9

 CREATING A DISTINCTIVE BRAND
Key areas for decisions:
– Choice of name
– Distinctive visual identity
– Distinctive service features and positioning
– Distinctive brand personality
and
– CONSISTENT DELIVERY!

© The McGraw-Hill Companies 2012 10

 DISTINCTIVE BRAND NAME
• What image is sought?
• Brand name should allow future development:
– Entry to new business sectors (e.g. Aviva)
– Entry to new international markets
• Difficult for a service brand name to recover
from bad reputation – change name e.g.
Arthur Anderson > Accentrure

© The McGraw-Hill Companies 2012 11

 DISTINCTIVE VISUAL IDENTITY
Logos can be very powerful - these designs convey
meaning, even with the ‘wrong name’

© The McGraw-Hill Companies 2012 12

 BRANDING - STRATEGIC
OPTIONS
• Develop a single strong brand
• Differentiated brands
• Brand families
• Brand extension

For services, the provider is generally more likely to be

the brand rather than individual service offers

© The McGraw-Hill Companies 2012 13

 THINKING
AROUND CREATING A BRAND IN
THE CYBERSPACE
SUBJECT

• Brand managers must increasingly interact

with user generated blogs to create brand
identity
• Research organisation Virtue records
conversations for brands on a variety of
social media. In 2009 it reported that the
brands of iPhone, CNN, Starbucks, Apple
and iPod dominated the social space.
• How does a company develop its brands
online?

© The McGraw-Hill Companies 2012 14

 OLIGOPOLY
• Oligopoly market is dominated by a small
number of sellers who provide a large share
of the total market output
• All suppliers in the market are
interdependent
• One company cannot take price or output
decisions without considering the specific
possible responses of other companies

© The McGraw-Hill Companies 2012 15

 MONOPOLISTIC MARKETS
• A scale monopoly occurs where one firm
controls 25 % of the value of a market
• A complex monopoly occurs where a
number of firms in a market together
account for over 25% of market value
• Effect of monopoly to reduce output and
raise prices
• Pure monopoly is rare

© The McGraw-Hill Companies 2012 16

 HOW COMPETITIVE IS A MARKET?
• Even in imperfectly competitive markets, the
level of competition varies
• Big effects of barriers to entry to market
• Legislative change can change the nature of
competition (e.g. deregulation of UK gas
supply market)

© The McGraw-Hill Companies 2012 17

 PORTER’S “FIVE FORCES” MODEL
OF COMPETITION
Competition is the
result of:
• the threat of new
entrants
• the threat of substitute
products
• the intensity of rivalry
between competing
firms
• the power of suppliers
• the power of buyers
© The McGraw-Hill Companies 2012 18
 COMPETITION POLICY
• Governments generally presume that
competitive markets are better for the public
– more choice and downward pressure on
prices
• But can restrictions on competition be
justified in some cases?
• Sometimes a difficult balance between
competition and regulation

© The McGraw-Hill Companies 2012 19

 GOVERNMENT COMPETITION
POLICY
Seeks to overcome problems of
– The presence of large firms that are able to exert
undue influence over the market
– Collusion between sellers (and sometimes buyers)
– Barriers to market entry and restraints on trade
– Rigidity in resource input markets

© The McGraw-Hill Companies 2012 20

 COMMON LAW INTERVENTION

• Unlawful to act in restraint of trade

• Problem of defining ‘reasonable’ actions by

firms which seek to restrict competition
(e.g. clause in employment contract
preventing employees leaving to set up a
competitive business)
© The McGraw-Hill Companies 2012 21
 STATUTORY INTERVENTION TO
IMPROVE COMPETITIVENESS OF
MARKETS
• Articles 85 and 86 of Treaty of Rome
• Enterprise Act 2002 (UK)
- The Director General for Fair Trading
- The Competition Commission
- Public utility regulators

© The McGraw-Hill Companies 2012 22

 THINKING
AROUND IS MICROSOFT TOO
THE POWERFUL?
SUBJECT

• Long running dispute between the

EU and Microsoft
• By 2008, EU had fined Microsoft
€1.68 billions for anti-competitive
practices
• Is the EU being too harsh on a
successful company, or has
Microsoft abused its powerful
market position?

© The McGraw-Hill Companies 2012 23

 RECENT OFT / COMPETITION
COMMISSION FINDINGS
• 2009 ordered BAA to sell some of its airports
to increase competition within the sector
• 2007 £121m fine on British Airways and Virgin
Atlantic for colluding on flight fuel surcharges
• 2007 Dairy processors and supermarkets fined
£116m for colluding to fix prices of dairy
products
• 2006 50 independent schools fined £500,000
for colluding on fees

© The McGraw-Hill Companies 2012 24

 THINKING
AROUND IS THIS PERFUME TO
THE EXPENSIVE?
SUBJECT

• Perfume prices higher in UK than

many other countries
• Perfume companies try to reduce
price competition, e.g. by
restricting sales via supermarkets
• OFT held that this was OK – ‘a low
price would be perceived by
buyers as an inferior product’

© The McGraw-Hill Companies 2012 25

 CONFUSION PRICING
• Do firms
deliberately make it
difficult to compare
prices – e.g. mobile
phone tariffs

• Is this an anti-
completive
practice?

© The McGraw-Hill Companies 2012 26

 PRICING OF PUBLIC SERVICES
• Social and political considerations may be
important
• No straight forward cost-volume-price
relationship
• Issues of equity may be involved

© The McGraw-Hill Companies 2012 27

 ARE THERE PUBLIC SERVICES WHICH
CANNOT BE PRICED?
• Roads previously
considered a public
service and consumers
not charged a price
• What about health and
education services?
• Or University tuition
fees?

© The McGraw-Hill Companies 2012 28

 SUMMARY
You should now understand
• The effects of market structure on firms’ output
and pricing decisions
• The role of brands in reducing generic
competition
• The causes and consequences of market
imperfection
• Legislative measures designed to preserve
competitive markets

© The McGraw-Hill Companies 2012 29

 CASE
STUDY COMPETITIVE MARKET
FOR MOBILE PHONES
STILL NEEDS REGULATION
• Mobile phones often compete fiercely with each other
• But buyers can be vulnerable to anti-competitive
practices by phone firms, e.g. agreements between
firms for “termination charges”
• How do governments strike a balance between
competition and regulation?

© The McGraw-Hill Companies 2012 30

 END

© The McGraw-Hill Companies 2012 31