Economic Analysis

Lesson 19. CLASSIFICATION OF MARKET

Module 5. Concepts of market

Lesson 19
CLASSIFICATION OF MARKETS

19.1 Introduction

There is an unsolved debate in management literature as to whether the first step in the strategic marketing process is to identify opportunities or to set objectives. It is possible to start the strategic-marketing process by looking either at opportunities or at objectives. Growth opportunities can be generated for an industry by mapping its core marketing system and then moving to three levels of analysis. The first level of analysis discerns those opportunities present in the current product-market activity of the company; we call these intensive growth opportunities. The second level discerns those opportunities present in other parts of the core marketing system; we call these integrative growth opportunities. The third level discerns those opportunities present completely outside of core marketing system; we call these integrative growth opportunities.

19.2 Classification of Market Structure

Market means a place where people gather to carry out transaction and exchange something for value. Market is an essential part of any economy and provides the sellers and buyers a meeting place to facilitate exchange. According to market structure, markets are of the following types:

a) Perfect Competition

b) Monopoly

c) Monopolistic Competition

d) Duopoly

e) Oligopoly

a) Perfect Competition

In economic theory , perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction -type markets, say for commodities or some financial assets, may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets.

Characteristics:

– The product is homogeneous.

– There is free entry and exit in the industry.

– Every firm’s action is independent of the other firm.

– In this market there is perfect mobility of factors.

– The sellers operate in conditions of certainty having complete knowledge of costs, demand, price and quantities.

b) Monopoly

A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. In law, a monopoly is business entity that has significant market power, that is, the power, to charge high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market). Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods .

Characteristics

– There is only one firm selling the product.

– The firm has no rivals or direct competitors.

– Substitutes may exist. However, close substitutes are non existent.

– Difficult entry for other firms.

– The monopolist is the price maker and tries to take the best of whatever demand and cost conditions exist without the fear of new firms entering to compete.

– Monopoly is not a permanent situation. Due to reasons like emergence of close substitutes, entry of new firms, etc. a firm which is a monopoly now may not be a monopoly in the future.

c) Monopolistic Competition

Monopolistic competition refers to a situation where the product to be sold is differentiated and there are many sellers operating to sell it. The competition is not perfect and is between firms making similar products (not substitutes).

Characteristics

– There are many sellers and no seller is big enough to influence the market price.

– Each seller has an independent price-output policy.

– Product is heterogeneous due to differentiation. Product of each firm is a close substitute of the product of other firm.

– Patent rights, advertising, quality differentiation, etc. are used as the main instruments of product differentiation.

– There are no restrictions on the entry and exit of firms.

– Each individual firm enjoys some monopoly power due to product differentiation and hence, the demand curve is more elastic than that of the monopoly firm.

d) Duopoly

A true duopoly is a specific type of oligopoly where only two producers exist in one market . In reality, this definition is generally used where only two firms have dominant control over a market . In the field of industrial organization , it is the most commonly studied form of oligopoly due to its simplicity.

Characteristics

– The number of sellers in this market structure is only two.

– The decision of the sellers is not independent of each other.

– The change in price and output by one seller affects the other seller who reacts to the change.

– The product can be homogenous or differentiated.

– The decision variables include price, product differentiation, selling expenses, etc. but the decisions depend upon the strategies of the competitor.

– Product differentiation is the entry barrier and also the firm dominating the market can pose as an entry barrier.

e) Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

Characteristics

– There is small number of large sellers.

– The product they sell can be differentiated or homogeneous.

– The policies of each seller have a noticeable impact due to the extent of influence of each seller.

– The element of interdependence.

– Cross elasticity of demand is very high due to the close substitutes of the product.

– Existence of price rigidity.

– The firms may enjoy some monopoly power.

– Strategies available to an oligopolist include advertising, quality improvement, etc. as the firms suffer from rigidity of prices.

– Oligopoly can be classified as perfect and imperfect oligopoly on the basis of product differentiation, open or closed oligopoly on the basis of entry of firms, partial or full depending upon presence or absence of market leader.

– When the firms follow a common price policy, it is known as collusive oligopoly.

19.3 Intensive Growth

Intensive growth makes sense for a company if it has not fully exploited the opportunities latent in its present products and markets.

The three major types of intensive growth opportunities are described below:

1. Market penetration

Market penetration consists of a company seeking increased sales for its present products in its present markets through more aggressive marketing effort.

2. Market development

Market development consists of a company seeking increased sales by taking its present products into new markets.

3. Product development

Product development consists of a company seeking increased sales by developing improved products for its present markets.

19.4 Integrative Growth

Integrative growth makes sense for a company if (a) the basic industry has a strong growth future and/or (b) the company can increase its profitability, efficiency, or control by moving backward, forward, or horizontally within the industry.

The three integrative growth possibilities are discussed below:

1. Backward integration : Backward integration consists of a company seeking ownership or ownership or increased control of its supply systems.

2. Forward integration : Forward integration of a company seeking ownership or increased control of its distribution systems.

3. Horizontal integration : Horizontal integration consists of a company seeking ownership or increased control of some of its competitors.

19.5 Diversification Growth

Diversification growth makes sense for a company (a) if the core marketing system does not show much additional opportunity for growth or profit, or (b) if the opportunities outside of the present core marketing system are superior. Diversification does not mean that the company will take up any opportunity however unrelated to its present distinctive competencies or needs. On the contrary, the company would attempt to identify fields that make use of its distinctive competencies or help it overcome a particular problem. There are three board types of diversification moves:

1. Concentric diversification : Concentric diversification consists of the company’s seeking to add new products that have technological and/or marketing synergies with the existing product line; these products will normally appeal to new classes of customers.

2. Horizontal diversification : Horizontal diversification consists of the company’s seeking to add new products that could appeal to its present customers though technologically unrelated to its present product line.

3. Conglomerate diversification : Conglomerate diversification consists of the company’s seeking to add new products for new classes of customers because this (a) promises to offset some deficiency or (b) represents a great environmental opportunity; in either case, these products have no relationship to the company’s current technology, products, or markets.

19.6 Market Segmentation

Market consists of buyers, and buyers differ in one or more respects. They may differ in their wants, purchasing power, geographical locations, buying attitudes and buying practices. This varied and complex buyer behavior is the root cause of market segmentation. A market segment is a meaningful buyer group having similar wants. Each segment can be a group of people with similar or homogeneous demand and this will enable the enterprise to have tailor-made marketing mix to each market segment. Segmentation is a consumer oriented marketing strategy. Though wants and desires of consumers are diverse, segmentation helps in grouping those consumers having similar wants or desires.

Market segmentation is a method for achieving maximum market response from limited marketing resources. This is made possible by recognizing the difference in the response characteristics of various parts of the market. In a sense, market segmentation is the strategy of ‘divide and conquer’.

Studies reveal that different organizations have different perceptions of marketing. And these differing perceptions have led to the formation of different concepts of marketing. It is found that at least five distinct concepts of marketing have guided that are still guiding business firms. They are:

- The exchange concept

- The production concept

- The product concept

- The sale concept; and

- The marketing concept

The Exchange concept of marketing, as the very name indicates, holds that the exchange of a product between the seller and the buyer is the central idea of marketing.

Production and technology dominate the thinking process of the key people in the business. They believe that marketing can be managed by managing production. The concept holds that consumers would, as a rule, support those products that are produced in great volume at a low unit cost.

Product Concept of marketing believes that the consumers would automatically vote for products of high quality. They concentrate on achieving product excellence.

The Product Concept is somewhat different from the Production Concept. Whereas the Production Concept seeks to win markets and profits via high volume of production and low unit costs of production, the Product Concept seeks to achieve the same result via produce excellence, improved products, new products and ideally designed and engineered products. It also places emphasis on quality assurance. In general, it tries to take care of the marketing task through the product attributes.

The Sales Concept became the dominant idea guiding marketing as more and more markets became buyers’ markets and as the entrepreneurial problem became one of solving the shortage of customers rather than the shortage of goods.

Marketing is much wider than selling, and much more dynamic. Selling revolves around the needs and interests of the seller; marketing revolves around the needs and interests of the buyer. Selling starts with the existing products of the corporation and views business as a task of somehow promoting these products. Marketing, on the other hand, starts with the customers of the corporation – present and potential – and views business as a task of meeting the needs of the customers by producing and supplying those products and services that would exactly meet the needs of the customers. Selling seeks profits by ‘pushing’ the products on the buyers. Marketing seeks profits not through the aggressive pushing of the products but by meeting the needs of the customers and by creating value satisfactions for them. In other words, marketing calls upon the corporation to choose products, prices and methods of distribution and promotion that would meet the needs of customers

The Marketing Concept was born out of the awareness that marketing starts with the determination of consumer wants and ends with the satisfaction of those wants. The concept puts the consumer at both the beginning and end of the business. It stipulates that the company should be organized totally around the marketing function, anticipating, and stimulating and meeting customers’ requirements