This article is about competition on the market.
Successful Marketing requires firms to understand which market they are operating in, who their consumers are and where they are located, whether the market is growing or shrinking, what the business’s share of that market is and how strong the major competitors are.
What is meant by market competition?
All business organizations around the world operate in a competitive environment which is constantly changing and evolving.
As there are usually many suppliers of the same product in the country, competition between the companies exists. Hence, market competition is the degree of rivalry in a particular industry.
In reality, most industries are dominated by a few large businesses with high market share which are called market leaders. Each of the large firms accounts for a large proportion of the industry’s total sales revenues.
In addition, there are also many smaller businesses with low market share in the same industry. Each of the small firms accounts for a small proportion of the industry’s total sales revenues.
Different types of market competition
Businesses compete in many different ways including on price and non-price factors, directly and indirectly.
A. Price competition. Businesses compete over the price of their products – goods and services. The firm with the lowest prices will win the competition which means increasing its own market share by taking away customers from rival firms. For example, online sellers of sports shoes on eBay compete with each other who can supply the same brands of shoes at the cheapest possible price.
B. Non-price competition. Businesses compete over features different from the price of their products. These features may include design, brand image, safety, reliability, durability, customer service, after-sale services, convenience, etc. For example, telecommunication network carriers such as T-Mobile, AT&T or Verizon are in competition with each other to provide its users with the most suitable range of mobile network services such as global coverage, wireless Internet access, gaming services, 5G phones, etc.
C. Direct competition. Direct competitors are other business organizations that provide exactly the same or very similar products. For example, Coca Cola and Pepsi are direct competitors for colas. So are McDonald’s and KFC as these firms both sell hamburgers, French fries and soft drinks.
D. Indirect competition. Indirect competitors are other business organizations that provide different products to satisfy the same customer need or want. For example, bus firms, trains, airlines and TAXIs are in different sectors, but provide customers with the same service – transportation from one place to another.
How to measure the strength of market competition?
Market Concentration Ratio measures the degree of competition within a particular industry – how strong the competition is between companies in a certain market. Market Concentration calculates the market share of the few largest firms in the industry (usually the market leaders), and then sums up those market shares.
Low Concentration Ratio = Strong competition
Low Concentration Ratio in an industry would indicate greater competition among the firms in that industry. The industry is perfectly competitive. An industry with a Concentration Ratio of 0% to 50% is viewed as low concentration.
An industry with a 2-firm concentration ratio of 30% means that the two largest businesses account for 30% of the total sales of the market. All the other companies account for the remaining 70% of the industry’s output.
A low concentration ratio would imply that there is a large number of businesses but none of these firms control a large part of a particular industry. The market for noodles, vegetables or rice has a large number of producers. Government regulators are usually not concerned with industries falling into this category.
High Concentration Ratio = Weak competition
High Concentration Ratio in an industry would indicate lesser competition among the firms in that industry. The industry is monopolized. An industry with a concentration ratio of 80% to 100% is viewed as high concentration.
An industry with a 2-firm concentration ratio of 90% means that the two largest businesses account for 90% of the total sales of the market. All the other companies account for the remaining 10% of the industry’s output.
A high concentration ratio would imply that a small number of businesses control a large part of a particular industry. The market for soft drinks, trains and aircraft manufacturers or oil drilling firms is dominated by only a small number of producers.
Government regulators are usually most concerned with industries falling into this category.
All companies in a particular industry need to not only look at its own sales performance, but also analyze how competitors influence markets. In this way, they will be able to figure out the way how customers respond to market competition.
