Market Structures, Organizational Responses, And Environmental Factors In Business Operations

Market Structure of Perfect Competition

This paper analyses different market structures in the economy and their decision regarding price output determination. Perfect and imperfect competition is considered here. Market forces such as demand and supply behaviour, pricing, cost and resources used in production is discussed here. PESTLE analysis is consider to discuss the impact of external environment on the business operation of the UK supermarket chain Iceland Foods Ltd. Iceland Foods Ltd is a rising grocery super market chain in Britain. This company sells both frozen and non frozen food itens in UK food market. This company operates in the oligopoly market with 2.2% market share in UK super market industry (iceland.co.uk. 2017). Importance of international trade on UK business environment is considered in this discussion.

Market structure of perfect competition

Number of seller in a perfectly competitive firm is infinitely large. All the firms sell homogeneous product and consumers have perfect information regarding product features. Hence, alteration of price is not possible. Price of the product is determined by the market demand and supply in this industry. Every perfectly competitive firm is hence price taker. They have no price determination power. In a perfectly competitive market price is equal to the average revenue and marginal revenue of the firm. Profit is determined by the individual cost structure. Entry and exit in the market is free and costless. Firms earn positive profit in the short run and hence firm can enter into the market with the wish of earning profit (Dunne et al. 2013).

Market structure of monopoly

A single seller operates in the monopolistic market. In the absence of competition, monopolistic firm determines the price and output itself. A monopolistic firm is price maker instead of price taker. Buyers have no bargaining power in the absence of any substitute good or potential competitors. Price charged in a monopoly market is hence greater than the perfectly competitive market. Monopolists sometimes used price discrimination policy in order to increase revenue. One can find exploitation in the market unlike perfect competition. Entry in the market is costlier as the monopolist uses the economies of scale to restrict the entry of new firm in the market (Bresnahan  and Levin 2012).

Market structure of monopolistic competition

A large number of sellers exist in the market. Every firm sells differentiated products, which are close substitute to each other. As large number of firms exists in the market, each firm holds little market share. Product differentiation provides market power to each firm to some extent (Moulin 2014). Entry and exit in the market is free and has no cost. Firms enter into the market only only when positive profits are earned by existing firms. Firms are price maker as consumers have imperfect information regarding products (Chen and Wu 2012). Demand is elastic as presence of perfectly substitute goods is high in this market. Advertisement is important factor for competition among firms.

Market structure of oligopoly

A few sellers exist in the oligopoly market. Firms sell either identical or differentiated products. Firms to capture greater market share use advertisement. Demand curve of oligopolist is kinked as other firms follow the price reduction by one firm. However, price hike is not followed in the market (Coase 2012). A firm with greater market share is the leader and other firms are follower in the market. Firms form cartel among them to create monopoly power and restricts entry by charging uniform price. Duopoly is a special type of oligopoly, where only two firms exist in the market.

Market Structure of Monopoly

Price output decision of a perfectly competitive firm

Price and output is determined where marginal revenue meets marginal cost of production of a perfectly competitive firm. Unlike imperfect competition, average revenue to the price in the market. A firm earns profit if P> ATC, average total cost (Nicholson and Snyder 2014). The horizontal straight-line curve in figure 1 is price line, which is charged by all the firms in the market. Demand in this market is perfectly price elastic. Marginal cost curve (MC) is the supply curve of the firm. AR curve is the demand curve of the firm. Price and output are thus determined at the intersection point AR=MR=MC=P (Loertscher and Reisinger 2014). At price P1, firms earn positive profit and at p2, that firm only can cover its variable cost as P = AVC. This is the shut down point of a competitive firm, where staying in the market or closing plant is equal to the firm. Firm stays in business only if there is possibility of profit in the long run.

Price output decision in imperfect market

In the imperfectly competitive market, firms have separate MR and AR curve to exploit the market. Output is supplied in the market where MR equals to the MC curve. However, price is determined according to average revenue. Firms earn positive profit, no profit or can make loss in the short run. Firm charges higher price than marginal cost (Martin 2012).

PESTLE analysis

UK business exchanges not only produced goods and services but also exchanges capital across international boarder. As economic resources are scarce, UK business economy cannot produce every necessary products to satisfy domestic needs (Abdi and Aulakh 2012). Therefore, import of products in required. UK economy can produce and export those goods, in which UK businesses have absolute advantage in production (Dunning 2012). UK firms export those products, which can be produced using cheaper factors of production including financial and natural resources. UK economy either imports those goods, which are costlier to produce using scarce resources or do not have adequate infrastructure (Gopinath, Helpman and Rogoff 2014). Therefore, although a good is not produced in the domestic country, consumers get opportunity to consume that good. International trade increases the product range to the consumers. Supermarket chain Iceland Foods Ltd can increases grocery product range to the UK customers through international trade.

Trade with international market is beneficial for UK economy as trade provides opportunity of economic integration and capital flows across different nations (Dunning 2013). Moreover, firms not only import final products, they also import raw materials from foreign country to produce the goods domestically due to the import substitution policy of the government (Manova 2013). Companies such as Iceland Foods Ltd and other business organisations can open up business in another country.

The above chart shows that exports in non European country has increased overtime from UK economy and the that in EU countries has decreased steadily may be due to Brexit effect. Products that have main share in export are fuel, semi manufactured goods, finished manufactured products, food, beverages and tobacco.

Market Structure of Monopolistic Competition

UK businesses that have global operations are affected by the policies of the foreign countries. Changes global economic, political, legal and environment factors have significant impact on the UK businesses. Global economic problems such as global financial crisis, global slowdown and global bureaucracy in international affairs affect UK businesses. International terrorism has negative impact on the business. Stock market fluctuation also has uncertain effects on the business. Tariff rate between UK and other countries affect the trade and political relationship between UK and other countries. However, during global trade, global copyrights and intellectual property rights disputes may be faced by UK businesses.

Developing countries are prospective market for UK businesses. They can outsource their products at a low cost in the developing nations and labour is cheaper in these countries. However, emerging nations such as Singapore, China, and India are global competitors for UK business in terms of cost advantage. International organisation such as World Trade Organisation, World Bank and International Monetary Fund have important role in global trade and business. Any trade related policy change, competition policy and treaty between nations affects UK businesses in terms of revenue and profitability.

Global slow down of 2014-15 has affected UK trade and businesses. As growth of global businesses decelerates, opportunity of export is reduced in the UK economy as import demand from major countries decreases. Changes in the demand for goods and services affect business opportunity in UK. Therefore, in order to expand business globally, any business organisation needs to research on the market demand and consumer preference for the target products extensively. New technologies, foreign direct investment are positive effects of international trade in domestic business.

As UK is the member of European Union, policy regulations affects directly to the local businesses of UK. Common Agricultural Policy is a policy set by European Union to implement a programme of agricultural subsidies and other related policies. Three major principles of this policy are market unity, financial solidarity and community preference, which have to be followed by member countries. UK is a countries, which has greater monetary share in EU compared to other states. Therefore, special annual UK rebate has been started in 1984. CAP reform has been brought to face and mitigate economic, environmental and territorial challenges in rural areas. CAP reform has come into force in 2014. However, CAP policy has been criticised for several reasons as neoliberal globalisation supporters have referred this policy as anti globalisation movement. Criticism has been faced mainly due to subsidy provided to the member countries, which is claimed to bring unfair competition. As stated by Gosden and Dakers (2016), CAP has two pillars such as direct payments to the farmers and funding for the rural economy. During 2015, UK farmers obtained £2.4bn in terms of direct payments. 55% of the total UK income from farming comes from the Cap support programme (Evans-Pritchard 2015). Therefore, Brexit effect may lead to a uncertainty for the income of the UK farmers as the trade and economic relation after Brexit is not clear yet to the business farms and UK farmers. British farmers currently receive 60pc of the income from EU subsidies. After Brexit, farmers are likely to lose that income unless the UK government would provide support. Therefore, effect of Brexit is not good news for UK farmers.

Market Structure of Oligopoly

Another policy of EU regarding freedom of movement for workers may affect the UK business. This policy entails that there would no discrimination based on nationality among the member states. Employment, remuneration, work condition would be unaffected by this policy. Therefore, free movement of workers are allowed among the EU member countries. However, this policy is applicable for private sector and not fore public sector. The effect of UK economy would be mixed after Brexit. Increase in labour supply reduces the cost of labour such as wage rate. Therefore, free movement of labour is beneficial for UK economy and business firms. This policy can attract global talent without bearing much cost. However, UK government wants to restrict overflow of job seekers in UK economy to keep safe domestic job opportunity. UK economy enjoys freedom of goods, capital and services being a member of EU. Exit from EU may lead to economic uncertainty in UK and its government policy. As suggested by Peter (2014), UK economy has the opportunity to pursue single market through allowing migration and free flow of capital, labour and goods and pool of talents. Domestic labour policy in the UK at the post Brexit stage would have impact on the domestic employment and per capital income and in turn standard of living of people.

Conclusion

The report has highlights different market structure and their pricing policy in the market. Price output decision in different market structure. Number of seller in perfectly competitive market is infinitely large, while number firms decreases in the imperfect markets such as monopoly, monopolistic competition and oligopoly. Price charged in perfectly competitive market is less than other market structure as firms are price taker in PC and they are price makers in other industry. Impact of external environment on UK business and Iceland Foods Ltd has been discussed in the report. Any political, economic, environmental, legal, social and technological change in both national and international level has been considered in this study. The second part of the report has analysed regarding the impact of Brexit on UK economy. Two EU polices such as Common Agricultural Policy and Migration policy and their effects on UK business have been discussed in this report.

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