Read the text, and then decide whether the statements on the next page are TRUE or FALSE.

MARKET STRUCTURE AND COMPETITION

PLAN

I. Market

1. Power abuse and the importance of competition in any society.

2. Definition

3. Classification of markets

II. Classification of market structure in terms of types and sizes of the companies and their marketing strategies

Market structure is very complicated. In most industries and markets a lot of larger and smaller companies work. Any firm has its particular niche according to its specific features (unique selling propositions) and its own marketing strategies.

1. Market leaders

2. Market challengers

3. Market followers

III. Growth and diversification alone don’t guarantee a long-term success, but it comes from competitive advantage.

Porter’s theory of competitive strategy and advantage.

1. Five competitive forces

2. Three generic strategies

IV. Market structure in terms of competition.

1. Key characteristics of a market structure.

2. Four market structures – general comparison. (Describe a scheme)

V. Perfect competition.

1. Definition

2. Conditions for perfect competition

3. What industries satisfy these conditions (examples).Why do we study this model?

4. The desirability of perfect competition.

VI. Monopolistic competition.

1. Definition.

2. Conditions for monopolistic competition.

3. The desirability of monopolistic competition.

VII. Oligopoly.

1. Definition.

2. Characteristics and conditions of oligopoly.

3. Kinds of oligopoly and examples.

· duopoly

· dominant-firm oligopoly

· bilateral oligopoly

4. Desirability of oligopoly.

VIII. Monopoly

1. Definition.

2. Conditions for existing monopolies.

3. Causes of monopoly; barriers to entry the market.

4. Kinds of monopolies: сornring the market, bilateral, state, legal, natural, cartel.

5. Desirability of monopolies.

· The arguments against market concentration

· opinions in favour of monopolies (Can anything good be said about monopolies?)

· Are monopolies really a problem for governments?

IX. Monopsony/ duopsony/ oligopsony, etc.

VARIETIES OF MARKET STRUCTURE

I. MARKETS

A persistent problem in all societies is that of putting checks on power. There seems to be no exception to the general rule that unchecked power, whether it is the power of a state, an army, a church, or a private business institution, quickly becomes abused power. When asked what check on the power of individual businesses will be both effective and consistent with freedom, those who defend free market economics most vigorously, answer,”Competition”. The core of their argument has been that, as long as competition exists in markets, no one producer or group of producers can afford to abuse power by charging too much or by selling shoddy goods, for fear that consumers might turn away from them to buy from other producers. In line with that argument, one of the government’s task is to keep competition alive and functioning.

The notion of competition is very widely used in economics in general and in microeconomics in particular. Competition is also considered the basis for free market economies. In standard usage of the term, competition may also imply certain virtues. Markets are the heart and soul of a capitalist economy, and varying degrees of competition lead to different market structures, with differing implications for the outcomes of the market place.

It will be helpful to start the discussion by explaining clearly what is meant by the word ‘market.’ A market was originally a building, and still is for some goods, for example cattle or vegetable markets, and for some services, for example Lloyd’s for insurance. Generally speaking, a market is a gathering of people for buying and selling, the place or institution in which buyers and sellers of a good or asset meet.

Nowadays the market is understood as a set of conditions permitting buyers and sellers to work together, in many cases the market is a network of dealers linked physically by telephone and computer networks, and linked institutionally by trading rules and conventions. In its more general and abstract usage, a market refers to a set of sellers and buyers whose activities affect the price at which a particular commodity is sold, i.e., it refers to the package of agreements, which allows them to contact to buy and sell goods and services, to the set of all sale and purchase transactions that affect the price of some commodity that results from the successively declining degrees of competition in the market for a particular commodity.

For example, two separate sales of General Motors stock in different parts of the country may be considered as taking place on the same market, while the sale of bread and carrots in neighboring stalls of a market square may, in our sense, occur on totally different markets.

Market facilitates trade in goods, as in commodity markets; in securities, for example the bond market, the capital market, or the stock exchange; in labour services, as in the labour market; or in foreign currency, in the foreign exchange market.

Types of markets

1.There are two types of markets according to the character of concluded contracts:

· spot markets

· futures markets.

Spot market: the buying and selling of goods, currency or securities that arе available for immediate delivery.

Futures market: the buying and selling of goods, currency or securities for delivery at a future date for a price fixed in advance.

2.Also, there are three types of markets according to their function:

· commodity markets/exchanges,

· foreign exchange markets.

· stock markets/exchanges,

Сommodity markets/exchanges are the places where raw materials and some manufactured goods are bought and sold for immediate or future delivery. Main terminal markets are situated in London and New-York Terminal markets are the markets dealing mainly in commodities that will be available in the future (futures) rather than goods that are available immediately (actuals). Actuals are the goods that can be purchased or sold on the spot market and used, as opposed to goods traded on futures contracts that are represented by documents. The spot price is usually lower than the futures price, except when there is a temporary shortage. Futures are the goods, currency or securities that will be supplied or exchanged on an agreed future date and for a price fixed in advance. Most terminal markets are outside the countries that produce the goods.

Deals on some commodities like, for example, tea are concluded at the auctions, where dealers are supposed to inspect every lot for sale. But in fact they deal with certified stock. The goods the quality of which may vary from lot to lot (like tea, spices etc.) are sold as is (according to samples). Certified stock is a commodities stock which had been checked and acknowledged proper (good) for delivery under the futures market contracts. The actuals and futures deals are concluded by way of daily callovers where the dealers are represented by commodity brokers, who buy and sell raw materials or manufactured products for a fee in a commodities market. As commodity prices can fluctuate significantly, the markets enable the sellers and buyers to hedge, i.e. to buy a commodity at a fixed price for future delivery to protect oneself against loss caused by a possible change in price, in other words, to hedge against rising prices.

Foreign exchange markets are the markets where foreign currencies are traded. Market makers acting on the foreign exchange markets are either dealers, firms hired by commercial banks and acting as principals buying and selling currencies for a profit for themselves or foreign-exchange brokers buying and selling for clients and acting as go-betweens therefore. Such markets are not entirely free as free markets where prices are allowed to rise and fall according to supply and demand, without prices being fixed by governments. Such a situation is called ‘clean floating’. Though many countries removed all exchange controls, i.e. a set of restrictions imposed by a government on buying and selling foreign currencies (e.g. to control operations which are to be indicated in the balance of payments as capital account using exchange equalisation accounts), the Central Banks of various countries (the Bank of England in the UK, Federal Reserve Bank in the USA), acting on behalf of their governments, influence to some extent the market situations. They resort to the Exchange Rate Mechanism, the scheme used by countries in the European Monetary System to keep the relative values of their currencies within agreed limits. The aim of the Exchange Rate Mechanism is to stabilise exchange rate fluctuations. Such currencies are called ‘currency snakes’ and the rate of exchange is called a managed currency. Foreign exchange deals can be concluded either on spot currency markets with immediate delivery or on forward exchange contracts markets.

Stock markets/exchanges are the markets where stocks and shares are bought and sold under fixed rules, but at prices controlled by supply and demand. The main idea of stock exchanges is to enable public companies, the state and local authorities to attract capital by way of selling securities to investors.

Stock markets are the means through which securities are bought and sold. The origin of stock markets goes back to medieval Italy. During the 17th and 18th centuries Amsterdam was the principal centre for securities trading in the world. The appearance of formal stock markets and professional intermediation resulted from the supply of, demand for and turnover in transferable securities. The 19th century saw a great expansion in issues of transferable securities.

The popularity of transferable instruments as a means of finance continued to grow and at the beginning of the 20th century there was an increasing demand for the facilities provided by stock exchanges, with both new ones appearing around the world and old ones becoming larger, more organized and increasingly sophisticated.

The largest, most active and best organized markets were established in Western Europe and the United States. Despite their common European origins there was no single model which every country copied.

Members of stock exchanges drew up rules to protect their own interests and to facilitate the business to be done by creating an orderly and regulated marketplace.

Investors were interested in a far wider range of securities than those issued by local enterprises. Increasingly, these local exchanges were integrated into national markets.

The rapid development of communications allowed stock exchanges to attract orders more easily from all over the country and later the barriers that had preserved the independence and isolation of national exchanges were progressively removed, leading to the creation of a world market for securities. The 1980s saw the growing internationalization of the world securities markets, forcing stock exchanges to compete with each other. Cross-border trading of international equities expanded.

Although many securities were of interest to only a small anal localized group, others came to attract investors throughout the world. Increasingly, arbitrage between different stock exchanges ensured that the same security commanded the same price on whatever market it was traded. London, Paris, New York became dominant stock exchanges.

Stock exchanges emerged as central elements in the financial systems of all advanced countries. Potential investors, insurance companies, pension funds governments and corporate enterprises see securities as a cheap and a convenient means of finance.

Investors need complete and reliable information about stocks and markets. In addition to the listings, the financial pages of newspapers in all countries contain price quotations and share indexes which give a broad indication of how the stock market, or a segment of the stock market, performed during a particular day. So people and organizations wanting to borrow money are brought together with those having surplus funds in the financial markets.

There are a great many different financial markets, each one consisting of many institutions, dealing with different instruments in terms of the instrument maturity and the assets backing it, and serving different types of customers.

II. Classification of market structure in terms of types and sizes of the companies and their marketing strategies

EXERCISE 1

Read the text, and then decide whether the statements on the next page are TRUE or FALSE.

A company's marketing strategies – sets of principles designed to achieve long-term objectives – obviously depend on its size: and position in the market. Other determining factors are the extent of the company's resources, the strategies of its competitors, the behavior of the consumers in the target market; the stage in the product life-cycle of the products it markets, and the overall macro-economic environment.

The aim of a market leader is obviously to remain the leader. The best way to achieve this is to increase market share even further. If this is not possible, the leader will at least attempt to protect its current market share. A. good idea is to try to find ways to increase the total market. This will benefit everyone in the field, hut the market leader more than its competitors. A market can be increased by finding new users for a product, by stimulating more usage of a product, or by exploiting hew uses, which can sometimes be uncovered by carrying out market research with existing customer.

To protect a marker share, a company can innovate in products, customer services, distribution channels, cost reductions, and so on; it can extend and stretch its product lines to leave less room for competitors; and it can confront competitors directly in expensive sales promotion campaigns.

Market challengers can either attempt to attack the leader, or to increase their market share by attacking various market followers. If they choose to attack the leader, market challengers can use most of the strategies also available to market leaders: product innovation, price reductions, cheaper or higher quality versions, improved services, distribution channel innovations, manufacturing cost reduction, intensive advertising, and so on.

Market followers are in a difficult position. They are usually the favourite target of market challengers. They can reduce prices, improve products or services, and so on, but the market leader and challenger will usually be able to retaliate successfully. A market follower that takes on a larger company in a price war is certain to lose, given its lesser resources.

In many markets, market followers fall in the middle of a V-shaped curve relating market share and profitability. Small companies focusing on specialized narrow segments can make big profits. So can the market leader, with a high market share and economies of scale. In between come the less profitable market followers, which are too big to focus on niches, but too small to benefit from economies of scale.

One possibility for followers is to imitate the leaders' products. The innovator has borne the cost of developing the new product, distributing it, and making the market aware of its existence. The follower can clone this product (copy it completely), depending on patents and so on, or improve, adapt or differentiate it. Whatever happens, followers have to keep their manufacturing costs low and the quality of their products and services high.

Small companies that do not establish their own niche – a segment of a segment – are in a vulnerable position. If their product does not have a "unique selling proposition," there is no reason for anyone to buy it. Consequently, a good strategy is to concentrate on a niche that is large enough to be profitable and that is likely to grow, that doesn't seem to interest the leader, and which the firm can serve effectively. The niche could he a specialized product, a particular group of end-users, a geographical region, the top end of a market, and so on. Of course unless a nicher builds up immense customer goodwill, it is vulnerable to an attack by the market leader or another larger company. Consequently, multiple niching – developing a position in two or more niches – is a much safer strategy.

1. If a market leader succeeds in increasing the size of the total market, its competitors benefit. 2. The size of a market can be increased without attracting any new consumers. 3. Market challengers generally attack the leader and market followers. 4. Market challengers cannot use the same strategies as leaders. 5. Market leaders generally win price wars. 6. Market challengers can attack leaders by way of any of the four P’s of the marketing mix. 7. Market followers generally achieve cost reductions through economies of scale. 8. The most profitable companies are logically those with medium or high market share. 9. For a market niche, product imitation can be as profitable as product innovation. 10. A market niche is never safe from an attack by a larger company.

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EXERCISE 2

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