According to a recent analysis of the construction market published by AMA Research (2017), the UK has experienced good demand since 2013, with construction output increasing by 11% between 2014 and 2016.

Not only is construction one of the largest sectors of the UK economy, construction also has a much wider significance to the economy, creating and maintaining the economic infrastructure, the homes, schools and hospitals which serve the society (Department for Business Innovation & Skills, 2013).

A modern, competitive and efficient construction industry is essential to the UK’s economic prosperity. The extent of control over prices is determined by a number of factors which will be researched in further detail below. The main factor is the amount of competition in a market, which is, in turn, determined by the number of firms and type of construction project.

This research paper aims to discuss the market structure of the construction industry and assess the impact on competition, prices, and costs, while examining the competitive strategies available to large contractors in the UK.

Construction Market Structure Overview

Different industries have different market structures. The market structure reflects the state of competition in a market: how firms of different sizes are distributed and how firms are diversified into different submarkets in which the firms compete with each other.

Before a firm can compete in a market, it has to be able to enter it. Many markets have at least some impediments that make it more difficult for a firm to enter a market (Caves et al., 1977). An entry barrier has the effect of reducing or limiting competition.

There are currently few significant barriers to entry to the building industry for small firms, and such barriers will continue to be low while the industry maintains current practices based on a large number of small, specialised subcontractors.

Because there are only a limited number of contractors capable of managing large projects, the barriers to entry at this level tend to be significant and contractors are chosen based on track record, financial capacity and technical capability. This is due to the risks associated with running a complex project (De Valence, 2017)

Economists identify four market types, each one has a set of distinctive characteristics:

1. Perfect competition

Where there is perfect competition, there are a large number of firms and the output of any firm is small relative to market output. The market product is homogenous. Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand.

The main characteristic is that neither the buyer or supplier can influence the price of the product, and there is a high rate of market transparency.

2. Monopolistic competition

Monopolistic competition incorporates features of both perfect competition and monopoly.

In a monopolistic competition, there are a large number of firms but their products are different. For example, according to de Valence (2017) there are subcontractors that have developed the characteristics of monopolistic competition for services such as heating, ventilation and air conditioning (HVAC). Medium size builders that operate in niche sectors of the construction industry and/or have developed relationships with repeat clients are also in this category.

3. Oligopoly

According to de Valence (2017) oligopolistic competition focuses on competition through product differentiation, or in the case of construction through the specialisation of particular types of projects such as high end residential, or infrastructure such as bridges, roads, etc., forms of procurement (e.g. design and build, traditional etc.), finance, or relationships with clients.

4. Monopoly

A monopoly is the opposite of perfect competition.

The degree of monopoly power exercised by the largest firms in an industry is expressed in the concentration ratio, which typically uses the largest four firms in an industry, ranked by market share or sales as a percentage of total industry sales.

The table below portrays the relationship between the construction industry and the three most relevant models of market structure, with the characteristics of each type.

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Competitive Strategy

Strategy is a contested concept (Green et al., 2007). The generic literature on strategy is characterised by a diverse range of competing theories and alternative perspectives.

Traditional models of the competitive strategy of construction firms have tended to focus on external factors. Despite this, Green et al. (2007) emphasises the importance of internal factors like innovative capabilities of company or strategic management issues, etc.

According to Hampson et al (1997) for a contracting firm to stand out amongst its competitors, it can adopt one or more forms of competitive advantage—strategic management in construction, bidding strategy (choice of procurement method), technological and organisational innovation, technology strategy, strategic planning and strategic alliances (e.g. mergers & aquisitions).

Growth strategies deal with the expansion and growth of existing assets and improving productivity while developing the position of the company in the market.

Porter’s three generic competitive strategies

Porter’s three generic competitive strategies have been broadly used in the management field. Porter (1980) suggests that “…there are three potentially successful generic strategic approaches to outperforming other firms in an industry: overall cost leadership, differentiation and focus”.

Cost leadership

The cost leadership strategy was popular in the 1970’s and is based on a firm’s objective to become the lowest cost producer in its industry. Thompson and Stricklend (1995) descri

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Introduction