Some markets are highly competitive, while others are a lot less so.
A good example of a competitive market in which there are many buyers and sellers is Internet booksellers. Because there are so many firms selling identical products then the price of these books will be highly similar. This competition helps to drive down the profit that such firms can make.
Competition occurs when two or more organisations act independently to supply their products to the same group of consumers.
Direct and indirect competition
Direct competition exists where organisations produce similar products that appeal to the same group of consumers. For example when two supermarkets offer the same range of chocolate bars for sale.
Indirect competition exists when different firms make or sell items that although not in head-to-head competition still compete for the same £ in the customer’s pocket. For example, a High Street shop selling CDs may be competing with a cinema that is also trying to entice young shoppers to spend money on leisure activities.
How businesses are affected by competition
Businesses are strongly affected by competition:
a. the price they charge is limited by the extent of the competition.
b. the range of services and the nature of the product they sell are influenced by the level of competition. For example, a business selling an inferior product to that of a rival will struggle to make sales unless it cut its prices.