R Lipsey (1992:786) defined market structure as “Characteristics of a market that influence the behaviour and performance of firms that sell in the market; the four main market structures are perfect competition, monopolistic competition, oligopoly and monopoly.”

R Lipsey (1992) cited that there are characteristics of each type of market structures:

Perfect competition – The firm is assumed to be a price-taker, the industry has freedom of entry and exit. The most comment example of this business will be farm products producers.

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Monopolistic competition – A market structure in which there are many sellers and freedom of entry but in which each firm sells a product somewhat differentiated from the others, giving it some control over its price. The most comment example of this business will be Chinese takeaway.

Oligopoly – An industry that contains only a few competing firms. There is a restriction of entry and exit. The most comment example is car manufacturers.

Monopoly – This is the opposite extreme from perfect competition. It exists when an industry is in the hands of a single producer. There are not many examples on the current market.

From the information I received from Latchford & Pickering, I compare the above situations and I would consider L & P is in the oligopoly market structure. There are three main characteristics of an oligopoly, these are: firstly there is some product differentiation, secondly there a few dominant firms and finally each of the firms are interdependent.

In this tool hiring industry there are seven main firms competing for market share. The first barrier is brand loyalty. New firms will have to produce a quality service to compete against these firms which have been on the market for a significant amount of time, this time would have led to consumer loyalty becoming apparent. Due to these services becoming established it means that potential firms to the market are going to face high sunk costs, in an attempt to make people aware of their services. Even when people are aware the price is still going to be relatively high due to the high capital costs encountered by the firm. This will possibly increase the price and lead to less demand for the service.

From this we can see that this market features oligopolistic characteristics. They occur due to the type of industry and firms within a market. As monopolies are in most terms illegal, certain industries can become oligopolistic, and collude to ensure profits acting in a monopolistic way. In every industry there is more than one firm contesting for market share, often being a small amount of firms that dominates the market, it is these characteristics which make an oligopoly a realistic market structure in most economies.

Impacts on Price Competition

In an oligopoly market structure, each firm knows it is being carefully monitored by the other. Therefore when L& P makes some marketing decisions, it may take into account how they thinks others will react, and other firms are likely to follow.

R Lipsey (1992) suggested that firms in oligopolistic industries that recognise their interdependence, face a basic dilemma: to compete against each other or to co-operate with each other. This can be explained by the Prisoners’ Dilemma Game Theory – N Mankiw (2001).

This table shows payoffs to you for various outcomes.

What Lucifer Does

Co-operate

Defect

What

You Do

Co-operate

Fairly good.

REWARD

for mutual co-operation.

3 points

Very bad.

SUCKER’S PAYOFF.

0 points

Defect

Very good.

TEMPTATION

to defect.

5 points

Fairly bad.

PUNISHMENT

for mutual defection.

1 point

Source from http://www.iterated-prisoners-dilemma.net/ (14 December 2004)

From the above diagram, we can see it will be in everyone’s interest to co-operate in the situation, this will produce the maximum outcome. And this follows onto the theory of the kinked demand curve.

This kinked demand curve shows that a rise or fall in marginal cost will not affect the profit maximising level of output or price. This shows relative price stability in oligopolistic markets. This means that if one firm increases its price then the other firms will not react to it, the firm will loose a percentage of its market share. For instance, if L ; P increases its prices then it is likely the consumers will look for a substitute and perhaps hire tools from Goodwin or opt for a small local tool hiring firms. However, if Latchford ; Pickering chooses to reduce prices then other firms in that industry will have to follow so not to loose their market share. This type of aggressive pricing can often lead to smaller firms going out of business as due to economies of scale they cannot afford to produce and sell at such a low price within their market.

Non-Price Competition

Non-price competition focuses on other strategies for increasing market share. There are many ways of keeping existing customers or to attract new customers. L ; P may wish to advertising on more specific media such as D.I.Y. magazines, TV adverts around home improvement programs and Sunday newspaper. Other marketing strategies such as loyalty point card, special promotion and money off vouchers are also very effective.

They can also offer other services such as free delivery / pickup of tools when customers hire tools for a period of time. Most customers prefer their items to be delivered rather than travel a distant to collect them. They may also wish to adjust their opening time to later hours so customers can collect their tools after the working hours.

L ; P may also wish to set up credit accounts for their existing customers, this can be 0% finance or discount in early settlement. Most of the firms nowadays offer this type of services to attract news customers and prevent their customers going else where.

Possible reactions of Competition Commission for proposed take-over

The overriding objectives of Competition law concern the efficiency between producers, suppliers and retailers, the protection of the consumer and small and medium sized firms as well as creating the integration of a single market. However, these objectives can be unattainable due to other policy objects such as the safeguarding of employment or regional or structural imbalances.

The policy of competition law intends to protect four issues, which occur within the free market of trade within and between Member States. The first is to prevent agreements with a restrictive nature being made between firms that do not have a beneficial effect. The second is to control monopoly firms with market power from abusing their position and preventing competition entering the market as well as distorting the market itself. Thirdly, a workable market needs to be watched and maintain in oligopolistic markets. Fourthly, the monitoring of mergers is required to prevent concentration of the market dominance and diminish competitive pressures within it. EC policy is broad to allow the Commission to develop the principles. Other policies including economic, social and political can have an effect on competition. Different weighting is given to policies when deciding upon the facts before the courts.

Competition law is based on assumptions of Perfect Competition which assumes that there is an unlimited amount of buyers and sellers, there is free entry and exit to the market, products are identical and homogeneous and there is full product information available to the consumer to be able to form a rational choice and decision on the purchase of products. However, the conditions to aspire to Perfect Competition are not so easily achieved within the market itself, in fact virtually impossible as the market is not consistent or stable.

On the other hand, not having any competition regulations will leave the market open to domination by monopolistic firms. This enables the firm to control the output of products and fixing the price of products. The monopoly distorts the natural competition of the market. Although the formation of a monopoly is economically harmful, it is acceptable to have a natural monopoly where the cost to produce two products is cheaper than one.

The effects of competition comply with its objectives in producing greater efficiency, consumer welfare and protection of small and medium sized firms within the markets. Efficiency is created when resources are supplied in accordance with demands, therefore an adequate number of products are produced without any over production thus reducing cost. In being efficient the production costs are kept to a minimum in order to gain the efficiency and maximise profits. These profits allow investment in dynamic efficiency to improve the product through research and development. Competition between firms allows the consumer to have several benefits as they have a wider choice of products, a better range of products due to innovation and lower prices. This permits the consumer to have a freedom of choice when selecting their product. Competition also enhances the freedom of firms to enter the market, compete with, and be protected from those already established.

The Competition Commission will investigate whether or not if this is in the public’s interest for L & P to take over St Andrews Tools Ltd. The Competition Commission will make decisions on the competition questions and for making and implementing decisions on appropriate remedies. The Competition Commission can cancel the reference concerning the proposed acquisition.

Reasons of rising wages

The labour market is very similar to the goods market in a perfect competition. People are the supply of labour and employers are the demand of labour. Elasticity of demand for labour is relevant to the elasticity of demand in product. Just like the prefect competition, where higher wages have less demand than lower wages.

L & P is having difficulty employing the appropriate skills workers, therefore the supply of labour is inelastic, and the supply curve will be a deep slope like below diagram.

Source from http://www.bized.ac.uk/educators/16-19/economics/wages/presentation/labmarket1.ppt#269,12,The Labour Market (14/12/2004)

B Atkinson & R Miller (1998) cited that the demand for labour is a derived demand. Firms demand labour not for its own sake but to bring in profit. Firms can increase profit by adjusting the quantity of labour and this brings into the law of diminishing returns.

Source from http://www.bized.ac.uk/educators/16-19/economics/wages/presentation/labmarket1.ppt#261,6,Slide 6 (14/12/2004)

An increase in the demand for labour lead to an increase demand for the product, this result to a rise in wages and in the quantity of labour employed. There are other factors that limit the supply of labour such as geographical local and the age group within the area.

Biography

Atkinson B & Miller R (1998), Business Economics, Addison – Wesley

Mankiw N (2001), Principles of Economics, 2nd edition, Troy, Harcourt

Lipsey R (1992), An Introduction to Positive Economics, 7th edition, London, George Weidenfield and Nicolson Ltd

Salvatore D & Diulio Eugene (1996), Principles of Economics, 2nd edition, USA, The MvGraw-Hill Companies Inc.

Worthington I & Britton C (2000), The Business Environment, 3rd edition, Essex, Pearson Education Ltd

http://www.bized.ac.uk (14/12/2004)

http://www.competition-commission.org.uk/ (14/12/2004)

http://www.iterated-prisoners-dilemma.net/ (14/12/2004)

Reference

Atkinson B & Miller R (1998), Business Economics, Addison – Wesley

Mankiw N (2001), Principles of Economics, 2nd edition, Troy, Harcourt

Lipsey R (1992), An Introduction to Positive Economics, 7th edition, London, George Weidenfield and Nicolson Ltd

http://www.bized.ac.uk (14/12/2004)

http://www.iterated-prisoners-dilemma.net/ (14/12/2004)

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