What is market power?

Market power is a business's ability to influence the price, terms or conditions in its market rather than having to accept them, and it comes from holding a large share of that market.

Give two ways a business with market power can use it against its suppliers.

It can demand lower prices because losing the order would be serious for the supplier, and it can impose longer payment terms that improve its own cash flow at the supplier's expense.

How can market power harm customers?

With little competition the firm can raise prices, narrow choice and let service quality slip without losing much custom, and it faces far less pressure to innovate.

Why do competition authorities take an interest in market power?

Because a dominant firm can exploit customers and shut rivals out, so the authorities examine mergers and investigate abusive behaviour in order to keep markets competitive.

Name two ways a dominant business can make entry harder for new rivals.

It can cut prices below the level a small entrant could sustain, and it can tie up the best suppliers, sites or distribution with exclusive agreements.

OCR A-Level Business (H436) H436

Business Activity

Topic overview Buying, selling and adding value Spotting an opportunity and starting a business Entrepreneurs and intrapreneurs Risk, reward and uncertainty Business objectives: profit, growth, survival and sustainability SMART objectives and the usefulness of objectives Primary, secondary and tertiary sectors Sole traders and partnerships Private and public limited companies Liability, legal status and choosing an ownership structure Social enterprises and not-for-profit organisations The stakeholders of a business What each stakeholder wants from a business Conflicting stakeholder objectives Measuring the size of a business Organic growth and franchising Mergers, takeovers, integration and diversification Factors influencing the scale of operations Economies and diseconomies of scale Market power and overtrading Stages of the customer journey Customer experience and how it is measured

Marketing

Topic overview The purpose of marketing and the unique selling point Market orientation and product orientation Why a business researches its market Primary research: questionnaires, focus groups and observation Secondary research sources and their reliability Random, stratified and systematic sampling Qualitative and quantitative research data Market size, market share and market growth Consumer markets and business markets Mass markets and niche markets Segmenting a market into customer groups New product development, innovation and R&D The product life cycle and extension strategies The Boston Matrix and product portfolio analysis Skimming, penetration and cost-plus pricing Competitor, psychological, dynamic and freemium pricing Price and income elasticity of demand Advertising, sponsorship and public relations Sales promotion, direct mail and point of sale Branding and packaging Social media, influencers and content marketing Websites, search engine optimisation and pay-per-click advertising Distribution channels, e-commerce and intermediaries Why businesses forecast their sales Historical sales forecasting and the line of best fit Intuitive forecasting and forecasting for a new product Big data and artificial intelligence in marketing Gamification, virtual reality and augmented reality Complaints, reviews and the net promoter score

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Operations

Topic overview The purpose of operations and the transformation process Added value and how it is calculated Ways of adding value: convenience, branding, design and facilities Sustainability as a way of adding value Automation, robotics and 3D printing in production AI, cloud services and digital technology in production Efficiency, effectiveness and productivity Measuring and improving productivity Production quality: purpose and standards Quality control and quality assurance Capacity utilisation and how it is calculated Managing capacity: increasing output, cutting capacity and outsourcing Types of inventory and the purpose of inventory control Inventory control charts, re-order levels and lead time Just In Time and inventory management systems The stages of supply chain management Logistics: procurement, transport and reliability of supply Key performance indicators in operations

Finance

Topic overview The finance function and business failure Assets, liabilities and capital Cash, profit and working capital Cost behaviour and sales revenue Contribution and the break-even point Break-even charts and the margin of safety Using contribution to make short-term decisions Levels of profit and profit margins Budgets and budget setting Budget variances Cash flow forecasting and its uses The structure of a cash flow forecast Remedies for a cash flow shortage Liquidity, the current ratio and the acid test Retained profit, owners' investment and asset sales Loans, overdrafts and other debt finance Share capital, venture capital, crowdfunding and grants Choosing a source of finance Financial statements and who uses them The income statement The statement of financial position (balance sheet)Return on capital employed and gearing Inventory turnover, receivable days and payable days Ratio analysis and its limitations

External Influences

Topic overview Demand, supply and the market mechanism Price, income and the drivers of demand Costs, capacity and the drivers of supply Rivalry, market share and competitor behaviour Imports, exports and the case for open trade Trade barriers and trade agreements Exchange rates and the value of the pound Culture, law and politics in overseas markets The forces behind a globalised market Political stability and the reach of government policy The business cycle and the state of the economy Interest rates, tax and subsidies Demographics, lifestyle and cultural change Shopping habits, communities and pressure groups Artificial intelligence, automation and robotics Cybersecurity, cloud services and connected devices

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Business Activity

Market power and overtrading

1 thing to know
Component 01

Overview

Recall questions on market power and how it affects suppliers, customers and new entrants, why competition authorities watch it, and the causes, warning signs, consequences and avoidance of overtrading.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

How can market power benefit a business's customers?

Questions from this subtopic

Each one with the model answer underneath.

1
What is market power?
Model answer
Market power is a business's ability to influence the price, terms or conditions in its market rather than having to accept them, and it comes from holding a large share of that market.
2
Give two ways a business with market power can use it against its suppliers.
Model answer
It can demand lower prices because losing the order would be serious for the supplier, and it can impose longer payment terms that improve its own cash flow at the supplier's expense.
3
How can market power benefit a business's customers?
Model answer
Scale and buying power can lower costs and therefore prices, and a dominant firm can afford investment in range, availability and service that a small rival could not match.
4
How can market power harm customers?
Model answer
With little competition the firm can raise prices, narrow choice and let service quality slip without losing much custom, and it faces far less pressure to innovate.
5
Why do competition authorities take an interest in market power?
Model answer
Because a dominant firm can exploit customers and shut rivals out, so the authorities examine mergers and investigate abusive behaviour in order to keep markets competitive.
6
Name two ways a dominant business can make entry harder for new rivals.
Model answer
It can cut prices below the level a small entrant could sustain, and it can tie up the best suppliers, sites or distribution with exclusive agreements.

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