Market Competition Structures and Business Financing Options
Types of Market Competition
Competition is a fundamental element ensuring the functioning of a capitalist economy, with the market acting as the regulatory mechanism for the nature and quantity of production, as well as the subsequent distribution of income generated by economic participants. In a system of perfect competition, market forces determine prices and quantities produced, influencing consumption, savings, and investment. Let’s examine different competitive situations:
Perfect Competition
The conditions necessary for perfect competition include:
- Uniform Goods: Products are identical, allowing consumers to choose any supplier without preference.
- Many Buyers and Sellers: A large number of participants on both sides of the market prevents any single entity from influencing prices.
- Perfect Information: All participants have complete knowledge of transactions and market conditions.
Monopoly
This market structure features only one seller. Monopolies are rare and often arise due to regulatory, tax, or infrastructure reasons.
Monopolistic Competition
In this market, sellers have certain monopoly-like advantages (e.g., branding) that others lack. Differentiation is based on factors like brands, product features, or packaging. Compared to perfect competition, performance isn’t solely based on price; other factors like product features and advertising become crucial.
Oligopoly
This occurs when a few competitors dominate the market. Each seller has significant power to influence the total market price by adjusting their offered quantity. It is common in sectors like automotive, pharmaceuticals, cement, and fuel.
Business Financing: Internal vs. External Sources
Internal Financing
Internal financing comprises the following:
- Amortization: Funds generated within the company to account for the gradual loss of value of fixed assets; can represent tax savings.
- Provisions: Funds set aside for anticipated future liabilities or losses where the timing or exact amount is uncertain.
- Reserves (Retained Earnings): Profits remaining after paying taxes and dividends, reinvested back into the company.
External Financing
External financing includes these alternatives:
Medium/Long-Term Markets
- Capital markets
- Credit markets (Loans from private banks and savings banks)
- Official loans (e.g., government-backed)
- Leasing operations
- Forward sale operations
- Stock market (primary/secondary offerings) and options
Short-Term Markets
- Trade discount operations
- Credits and loans (secured or unsecured)
- Factoring
State Aid / Government Support
Governments may offer financial assistance, such as:
- Capital subsidies
- Operating subsidies (Subvenciones de explotación)
- Subsidies for borrowings or debt reduction
Leasing
Leasing is a medium- to long-term financial operation, typically conducted by specialized institutions. Its legal basis is a lease agreement, often with an option to purchase the asset.
Types of Leasing
- Operational Leasing: Often offered by manufacturers or distributors as a financing alternative to promote sales, usually including a purchase option.
- Financial Leasing: Provided by specialized leasing companies. These institutions purchase assets selected by the user and then lease them, often with a purchase option. The primary purpose is providing a financial service.