Competitive Environment and Highly Competitive Market - Assignment Example

a highly competitive market is possible in the presence of a large number of buyers. Due to the presence of a large number of players, none of them has a clear control or controlling stake either in the market or in the price (Malcolm C. Sawyer, 1985). However, the competitive market operates based on several key influential factors, which will be used to explain the case of the store under analysis.

A highly competitive market means that each of the suppliers holds an insignificant share of the market, which means that the firm is small in comparison to the size of the overall market that comprises all the suppliers in the sector. As such, the influence of a single supplier on the market price is negligible and the quantity that each produces depends directly on the level of demand from consumers. The price that the firm sets therefore depends on this demand, due to which a supplier will be known as a ‘price taker’. Another factor that makes the market highly competitive arises from the identical nature and quality of the products manufactured by every supplier, which leaves the customer with very little choice to choose between the individual suppliers and brands. Thus, a high substitution of products is another major factor that contributes to the lack of governance on the price (Pass, Bryan Lowes, 1994).

The consumer is well informed on the prevailing prices in the market and the producers cannot modify the price above the market price as the higher price combined with the availability of identical products from other suppliers for cheaper prices will encourage the customer to consider other providers thereby bringing the substitution effect once again into play. Suppliers have equal opportunities in terms of access to resources and labor in addition to technological improvements. Thus, improvement in production capabilities by one firm can have a spillover effect on the other competitors and require them to make similar changes. As has been mentioned before, there are no barriers to entry or exit in the long run and the market is open to new suppliers. A company achieves equilibrium only in the long run by making a normal profit (Frank M. Machovec, 1995).

A firm is said to break even when total revenue equals total cost. In cases where the profits of most of the firms are varying in nature, the normal course is to undertake future expansion of existing firms and newer firms will enter the market. Firms will begin to witness the presence of additional profit and the introduction of new suppliers increases the supply causing the supply curve to shift outwards as shown below:

Assuming that the demand curve for the market remains unaltered, the increase in the supply as a result of more production will bring down the market price and bring it to the level until it equals the average total cost in the long run. However, the time required for this to happen is longer in duration and hence termed a long-term trend. At this stage, each firm can produce the goods at a cost that is exactly equal to the cost at which it can sell the product in the market. This is the point where the supplier is said to be making normal profits alone. There are no additional incentives and this indicates the establishment of a long-term equilibrium (Steven P. Schnaars, 1997).
This equilibrium is shown below:

The firm produces a quantity that is determined by the intersection of the marginal cost curve with the marginal revenue curve. In the case of a firm under high competition, the demand curve is the marginal revenue curve and the intersecting point is also the point where the average total cost of the product is at its minimum. Thus, the firm is producing at such a level that its cost of production equals the price at which it is selling the product, which suggests that the company can only break even in the long run.

A firm can however aim to derive economic profits in the long run by evolving into producing goods that are different from its earlier supply that was similar to the ones offered by several other suppliers in the market thus turning the market highly competitive. This distinguishes the product from other products in the market by making it more attractive to the target market. Known as product differentiation, it can be achieved in several ways ranging from varying the quality of the product with a corresponding difference in price or differences in which the product operates or provides service in comparison to other products existing in the market (Pass, Bryan Lowes, 1994). Product differentiation can also be achieved through enhanced promotion or by varying the periodicity and availability of the product. In all cases, the primary intention of relying on product differentiation is to create a position within a previously competitive market such that the position of the company becomes favorable and unique from the customers’ perspective in the long run thus leading to enhanced sales and increased revenue. Read More