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Market Structure
• The degree of competition in
an industry:
– Concentration Ratio (CR) – The
proportion of market share accounted
for by a number of firms in the
industry
– A five firm CR of 60% means the top
five firms in the industry account for
60% of total sales
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Market Structure
• Perfect Competition:
–Large number of buyers and
sellers
–Homogenous (identical) products
–Firms are price takers
–Perfect knowledge
–No barriers to entry and exit
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Market Structure
• Monopolistic or Imperfect
Competition
– Many buyers and sellers
– Some degree of control over market
– Differentiated products
– Relatively few barriers to entry
– N.B. Do not confuse ‘monopolistic’
with ‘monopoly’
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Market Structure
• Oligopoly – Competition between
the few – industry dominated by
relatively small number of large
firms
– Barriers to entry
– Non-price competition
– Price stability?
– Homogenous or highly
differentiated/branded
– Potential for collusion
– Potential for high profits
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Market Structure
• Duopoly – Industry dominated
by two large firms
– Market leader
– Price leader
– Barriers to entry
– Non-price competition
– Potential for abnormal profit
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Market Structure
• Monopoly – where firm is the
industry or where one firm
dominates the market
– Monopoly power is said to exist if market
share > 25%
– Natural monopolies – water, gas, electricity
– High barriers to entry
– Abnormal profits
– Can exercise control over price OR output
– Monopoly power may be necessary for
development of some products
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Market Structure
Highly Competitive High Degree of Market Power
Perfect Competition Monopolistic Competition Oligopoly Monopoly
Farming Restaurants Supermarkets Gas
Stocks Small Builders Banks Water
Currencies Solicitors Electrical Goods Electricity
Tele-
communications
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Legal Framework for Business
• Legislation - Laws made to
protect consumers, workers,
shareholders, environment from
business activity
– necessity of observing the law for
business – adds to cost, red tape
bureaucracy, etc.
• Covers almost every aspect of a
business’s activities
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Legal Framework
• Consumer legislation:
– Sale of Goods
– Trade Descriptions
– Consumer Protection
– Food Safety
– Supply of Goods and Services
– Weights and Measures
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Legal Framework
• Employee Protection:
– Health and Safety at work
– Minimum Wage
– Discrimination
– Unfair Dismissal
– Recruitment
– Redundancy
– Trade Union Legislation
– Contracts and terms of work
– Working Time Directive
– Disabled Persons
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Legal Framework
• Other aspects affecting business:
– Employers liability insurance
– Display screens (VDUs)
– Fire precautions
– Data Protection
– Accessibility legislation
– Hazards and risks
– Working environments – heating, lighting,
ventilation, etc.
– Patents
– Licences
– Planning Laws
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Issues:
• The extent of the regulation and
the legal framework within which
businesses operate all increases
costs both direct and indirect
(administration, monitoring, etc.)
• Balance between protection and
suffocating enterprise/initiative
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Regulation
• Monitoring business activity to act
in the consumer’s interest:
– Competition Commission – investigates
mergers, takeovers, anti-competitive
behaviour
– Office of Fair Trading (OFT) – ensuring
efficient operation of markets within the law
– Regulation of former nationalised industries
– OFTEL, OFWAT, OFRR, OFGEM, etc.
– Advertising Standards Authority (ASA) –
legal, decent, honest
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Regulation
• Forms of anti-competitive
behaviour
– Price fixing
– Cartels
– Collusion
– Predatory or destroyer pricing
– Distribution agreements
– Insider dealing/trading
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Self Regulation
• Where business/industry
monitors its own behaviour –
often through an agreed code
of practice. e.g.
– PCC – Press Complaints Commission
– Portman Group – alcoholic drinks
industry
– FSA – Financial Services Authority
– BMA – British Medical Association
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