In competitive markets, no any producer is a market leader or no any producer can determine the ways in which the market operates. There are a few conditions under which a competitive market is formed. The conditions are:
a. The profit motive- If by entering some market, the firm can achieve sufficient profits, it invests in those markets. The firm is said to achieve profits when its revenue equals or exceeds its costs.
Example: Reliance industries first invested only in telecommunications. Later, it observed that there are high profits in the Consumer Electronics market. Therefore, it came up with Reliance Digital stores.
b. Diminishability of goods- Diminishability means that as goods are purchased, their stock decreases or diminishes. Example, if a customer buys a mobile phone, now there is one less mobile phone for the other customers to purchase. As the stock reduces, producers expect the price of the goods to increase.
Example: Many large firms are trying to enter the Energy markets. With every litre of petrol, that I purchase, the petrol available on Earth reduces by one litre.
c. Rivalry- There should be consumer rivalry present in a market, to call it a competitive market. Example: These days having a very high end model of a laptop is considered as a status quo in the youth. Therefore, people strive hard to pay for the latest and the most expensive model possible.
d. Principle of excludability- It is essential that the consumers are excluded from obtaining any gain or profit possible from sale of the product. Example: If movies will be available free of cost, consumers will not buy it and then, how will the film industry generate its revenue.
e. Reject ability- In a competitive market, the consumers have a right to reject an unwanted product.
Example: No salesperson has the right to forcefully ask any customer to buy any product.
Long-term action plans need to be devised by a firm to sustain in these competitive markets. These action plans are known as competitive strategies. The company needs to establish a competitive advantage to combat the
efforts of its rivals.
Competitive strategies could be of various types depending on the firm, the overall industry and the consumers. Porter has devised a strategy matrix to represent the same. The matrix looks like shown above.