Differentiating Between Market Structures

      A market structure in economics describes the state of a market with respect to its competition.
There exist several different market structures like perfect competition, oligopoly, and monopolies
among others. These markets all produce different types of goods or services, like public and private
goods as well as common and collective goods. Firms operating in these different market structures
utilize the labor market in very different ways because of very divergent uses of labor in each market
structure, so it is important for a firm to use the labor market equilibrium principles to their advantage
to efficiently cover the costs of production and maximize profits.
      In economics a good is something defined as any object, service or right that increases utility, directly
or indirectly. Goods are further broken down into public and private goods. A public good is a good that
can be used simultaneously by many consumers, which is called non-rival, and people who have not
paid for the good can not be excluded from its utility, which in economics is call non-excludable.
Together this means that the consumption of a public good by an individual does not affect the
availability of that good to anyone else, which is called being non-rival and non-excludable. It’s obvious
to see however, that a truly non-rival and non-excludable good can’t exist; economists just look at the
goods that come close to the definition of a public good. A private good is the opposite and so it is
considered to be excludable and rivalrous. This means that the good can be refused to consumers who
haven’t paid and also that consumption of the good prevents other consumers from simultaneous
consumption of that same good. Restaurants, groceries, furniture, and cars are all examples of private
goods which are by definition rivalrous and excludable. A common good is a good that is rivalrous and
non-excludable. These are things like game hunting...

Wal-Mart is an organization that people across the globe are familiar with. Wal-Mart is an oligopoly
market structure. They are very effective as this market structure for this type of organization. They
offer low prices that competitors cannot compete with and yet they still seem to make huge amounts of
money. They also tend to run mom and pop shops right out of business. They also provide many jobs
that donate to the economy. Wal-Mart is also known for way that they do business. Wal-Mart only does
business with businesses that follow their terms and conditions. Not just anyone can sell products to
Wal-Mart. They also let you know what they will be selling your product for. They do not believe in
suggested retail pricing.

In many markets, there is often also a distinct market challenger, with the second-largest
market share. Market challengers can either attempt to attack the leader, or to increase their
market share by attacking various market followers – who concentrate on market segmentation:
finding a profitable niche (a small and specific market segment) in the market that is not satisfied
by other goods or services and that offers growth potential or gives the company a differential
advantage because of its specific competencies. Market followers present no threat to the leader.
A market follower who doesn’t establish its own niche is in a vulnerable position: if its product
doesn’t have a ‘unique selling proposition’ there is no reason for anyone to buy it. Although
small companies are generally flexible and can quickly respond to market conditions, their
narrow range of customers causes problematic fluctuations in turnover (a business’s total sales
revenue) and profit. Furthermore they are vulnerable in a recession when, largely for
psychological reasons, distributors, retailers and customers all prefer to buy from big, well-
known suppliers.
If we look at the ways different firms operate we’ll see that under some market forms firms have
no control over price, in others they have the power to adjust price in a way that adds to its
profits. So the last theme I’d like to cover speaking on this topic is different market structures.
Economists distinguish them according to
1)      how many firms they include
2)      whether the products of the different firms are identical or somewhat different
3)      how easy it’s for new firms to enter the market.
4)
There are four main market structures with perfect competition at one extreme and pure
monopoly at the other. In between are hybrid forms – called monopolistic competition and
oligopoly – that share some of the characteristics of both perfect competition and monopoly. So
let me explain what all of them mean.
Perfect competition exists when products are homogeneous, and there are many firms too small
to have any influence on the market price, and firms can easily enter and exit the industry.
And the situation where even one producer can affect the price of a good by increasing or
withholding output is called imperfect competition.
Monopolistic competition exists when many producers of slightly differentiated products are
able to sell them at well above their marginal cost.
The core of the argument for competition is 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 another producers.
In line with that argument one of the government’s tasks is to keep competition alive and
functioning.
Russian economy nowadays is a long way from being perfectly competitive. There are hints of
competition, but monopolistic tendency is more tangible.
A monopoly as a market in a particular product in which a single producer can fix an artificial
price. The opposite situation, where there is only one buyer is described as monopsony.
The situation where there are only a few sellers is called an oligopoly. This frequently arises in
manufacturing industry because of economies of scale – continuously declining unit costs as
production increases – and the cost barriers of entering an industry (in general, barriers to entry
are economic or technical factors that make it difficult or impossible for firms to entry a market
or compete with existing suppliers). One more barrier for new comers is cartel  - where
companies in the same industry collaborate by coordinating prices, sharing out markets, etc. In
many countries this is illegal, under anti-trust laws.
One type of oligopoly is called a dominant-firm ologopoly – in which a market leader can
indicate its preferred price to smaller competitors.
The situation in which there are only a small number of relatively large buyers in the market is
an oligopsony.
Some monopolies are legal. For example, investors are granted patents that give them
monopolistic privileges for a certain length of time. There are also natural monopolies, such as
water, gas, electricity and telephone where it may not be economic to have a large number of
competing companies laying cables or pipes to the same consumers. Consequently, utility
companies such as these are frequently granted monopolies, but with prices regulated by the
government.
In theory there are three types of monopolies: state monopoly, natural monopoly and legal
monopoly. In practice one more types is added – buying goods for speculative purposes. It
appeared due to the fact that some companies got the total control under some goods. This
activity is supposed to be illegal in many countries.
There are much arguing against and in favour of market concentration. The arguments
against monopoly are obvious: monopolists are always able to make excessive profits, and
businesses facing no competition have no incentive to find ways to reduce costs. The only
common argument in favour of monopoly concerns patents: it’s right that investor should be
granted a temporary monopoly as a reward for innovation or discovery.
Although some people argue that any barrier to competition will inevitably lead to inefficiency, a
counter argument is that erecting barriers – for example, by process innovation, product
differentiation, persuasive advertising, or pricing policy – in order to be successful and to make
competitors less successful, is a normal part of rivalry and competition. According to this view,
market concentration arises naturally from a few successful firms growing larger as a result of
increased efficiency, innovation, and economies of scale in production, distribution, R’n’D,
capital financing and so on.
Some people even argue that monopolies are always temporary and consequently not a problem.
For example, although entrepreneurs introduce new products and techniques and open up new
markets, their profits are soon competed away by rivals. Even the profits made by a natural
monopoly will be temporary, because they are an incentive for entrepreneurs to discover and
implement new low-cost technologies. An example here would be telecommunications.
According to this position, the government only needs to ensure that there is no monopoly over
important inputs, because there will never be a monopoly of scientific or artistic genius or
business ideas.

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Distributor discount pricing structures continue to be one of the most misunderstood and
underutilized elements in distributor marketing programs. Yet, their direct affect on your
company's and your distributor's profitability makes discount structures the most important
element in your business relationship. The truth is that most of your existing discount structures
were not designed to support today's marketing strategies and need to be re-evaluated. Many of
you probably inherited your current discount structures and cannot find internal documentation
that identifies the logic behind their original design. Some of you may find it difficult to identify
the individual responsible for discount structure design/strategy. Many companies change the
structure using a "team" approach, but few have an indi¬vidual that owns the responsibility.
And, if you're like most companies, you are avoiding making changes to your discount
structures, fearing that the end result will be perceived as either "a price increase" (which will
reduce unit sales) or a "a price decrease" (which will reduce profitability). It is quite common--
and generally successful--to change the way your sales force is compensated in order to promote
a positive change in its behavior. So, why not change the way in which your distributors are
compensated? Why not pay for the value you receive?

Does Your Distributor Discount Pricing Structure Create the Desired Channel Behavior?
A well-designed distributor discount pricing structure helps you achieve your marketing
objectives:

 Increase market share

 Establish presence in a distribution channel

 Emphasize particular product lines

 Discipline and control your marketing expenditures

 Reduce costs

 Differentiate between distributors

 Communicate your values and strategies

 Acknowledge and reward channel excellence

 Acknowledge and reward loyalty

Activity- and Value-Based Discount Structures

Well-structured discount programs are designed to compensate the distributor for performing
marketing functions (and the costs associated with performing these functions) that the
manufacturer would otherwise be responsible for:

 Carrying inventory

 Sales and technical support

 Order handling

 Extending credit

The concept of activity-based discounts is an extension of this cost transfer thinking. We believe
that activity-based discounting will be the future basis for all channel compensation. The roles
and responsibility of distributors and the basis for their compensation change as manufacturers
work to take costs out of their channel systems and improve customer service.

Another reason we believe that functional, activity- or value-based discounting will be the basis
for future discount structures is because we see new channel models emerging in various
industries. Some of these channels perform functions/activities that represent only a portion of
the activities performed by traditional channels. Manufacturers and service providers must assign
a value to specific functions and activities to deal with these new channel models (and to avoid
overpaying traditional channels).

Many firms are attracted to activity-based discounting because it is fair and generally supportive
of their overall marketing strategies. In essence, an activity-based discount structure "pays" the
channel for "what it does," or looking at it from the channel's perspective (just as your sales force
does), "you get what you pay for."

We have found that typically your best distributors applaud changes that result in differentiated
prices to your distributors. That is because your best distributors want to be recognized for the
investments they make to support your line--and they do not want the distributors that do not
make the investment to get the same deal. Legally, you are allowed to differentiate your price to
competing distributors if the discounts/rebates you make available for the performance of
activities or functions are generally available to all your distributors.

Many of the channel tiering programs that are becoming more common are intended to segment
dealers and distributors based on what they do for the manufacturer/service provider and
differentiate discounts and other benefits accordingly.

Basic Types of Discounts: Cost-Based and Value-Based

Cost-based discounts relate to transactions between the manufacturer and the distributor.

The manufacturer compensates for costs incurred by the distributor:

  Transferred costs that impact the distributor's overall cost structure (e.g., inventory, sales,
technical support skills)

 Transferred costs that occur on a case-by-case basis (e.g., co-op advertising, getting your
brand specified)

The manufacturer can also compensate for costs that have been reduced as a direct result of the
distributor's efficient activities.

Examples might include:

 Discounts for orders entered via EDI

 Cash discounts for prompt payment

 Rebates for low level of returns

Conversely, vendors must charge distributors for costs incurred from inefficient channel
activities (e.g., expedited orders).

Value-based discounting is used to differentiate and upgrade the performance of the channels.
Your distributors would typically be classified into groups representing differing performance
levels. Discounts are provided to distributors based on their performance levels.

Performance criteria might include:

 Number and quality of resources committed

 Sales growth

 Point-of-sale reporting

 Specific repair, tooling, kitting capability

Value-based discounts are often determined based on their combined value to the manufacturer
and the distributor (e.g., increased sales are a benefit to both).

A "value" that many manufacturers and service providers would like to incorporate into their
discount/reward structures is loyalty. Let's face it, if you can be sure that your dealer/distributor
is representing your brand when in front of an opportunity, your costs associated with supporting
that opportunity are significantly reduced. Many value-based programs are incorporating a
loyalty component. Examples include:

 Exclusively represent a manufacturer's brand

o Results in extra discounts

o Required to achieve top tier ("Gold") status

 Lead-line status

o In exchange for being your lead-line, extra discounts or other benefits

 Share of a distributor's sales in your category

o Rewards that are weighted based on your share

These programs require manufacturers/service providers to be able to measure a channel's

loyalty--and most that have incorporated a loyalty component into their discount programs have
a process for measuring loyalty (we do not advise that you use your sales force as the main
enforcer of a loyalty program).

Many companies' discount structures are based on order volume or sales forecasts and are not
effectively transferring marketing costs (see accompanying article). Due to poor design, these
structures compensate distributors for performing certain functions even though the manufacturer
continues to incur the costs associated with these functions. Consider your own situation--is your
distributor discount pricing structure creating the channel behavior you desire? Are you getting
what you're paying for?

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Introduction
The current business environment
requires vigilance, strong reactions to external markets and extra product offerings. Gone are the
days when business

would only focus on the needs of their clients; this approach is no longer viable in the market
today. Companies need to keep a close eye on their competitors.
How marketers identify primary competitors
Companies need to identify their competitors through two major perspectives; thy can choose an
industrial outlook or alternatively utilize a market approach.
Marketers using the industrial outlook need to realize that all companies providing similar
products or services fall in the same categories. Marketers need to ask themselves whether their
companies represent the monopolistic structure, oligopolistic structure, monopolistic competition
structure or pure competition structures since each of these structures will have different primary
competitors. The first structure is made up of only one company providing a particular good or
service. Such companies may not need marketers as they dominate the market. Oligopolistic
structures may have some competitors in the market but they are fe in number. On the other
hand, monopolistic competition applies to those who specialize in certain products. This category
has to identify their competitors. Lastly, there is the pure competition structure where all
competitors offer the same products. The automobile industry can be classified under the pure
competition sector but there may be instances when it also falls under the monopolistic
competition structure. (Brown, 1995)
After marketers have determined the kind of structure which they operate in, they now need to
look at specific factors that affect their industry in order top identify which competitors are the
most important o them. An industry that has low entry barriers and high exit barriers, then it will
most likely have numerous competitor who may be struggling to stay afloat. Most of them may
be surviving on the basis of covering their operating cots. However, others may have the ability
to cover their daily cost and even meet their capital cots too; these are the kinds of competitors
that marketers need to watch out for.
Marketers also need to be careful about their cost structures. Companies that seem to have firm
control over their cost especially in relation to industry requirements are the primary competitors.
Also, if a company operates in an industrial that is largely international, then chances are that the
most competitive companies are the ones who have a well established global markets and they
qualify as primary competitors. On the other hand, some companies may be operating in
industries with high levels of vertical integration. For instance, a company liaises with its
suppliers to create a larger market force. Such companies end up dominating the market and
therefore qualify s primary competitors. (Hope, 1997)
The automobile industry is affected by cost structure. It can be argued that they spend most of
this cost on production and advertising. In the nineties, Honda managed to establish a name for
itself especially in the US market because it invested in new technologies. Consequently, its
products were superior to those ones offered by other competitors such as Toyota and it became
a primary competitor for Toyota.
The second approach that companies can use to identify their primary competitors is through
marketing. In this approach, companies need to look out for those companies that satisfy the
same needs that they do. The current market has changed drastically. Primary competitors are not
just those companies offering the exact same things offered by the company; they are firms that
can serve similar needs. This approach requires that marketers trace all the captivities involved
while using their product and then examine what other firms perform the same activities. The
closest match will be the primary competitors while the next category of firms will be called
indirect customers. (Porter, 1985)
In the automobile industry, some of the central activities include; driving in dangerous terrains,
preventing accidents while driving, having some sort of entertainment when driving, filling up
the car with fuel, sitting in comfort and others. Based on these features, Toyota would identify its
primary competitors on the basis of these features. The Subaru Forester is a primary competitor
because it has lash seat belt, airbags, door locks and mirrors for safety or for prevention of
accidents. It has an FM/AM/CD player for entertainment. The Nissan is also a primary
competitor because it version of the Forrester has dual transmission plus AM/CD/FM player, air-
conditioning, cruise control, storage space and central locking for prevention of accidents. On the
other hand, the Honda model is also primary competitor because it has a picnic table that can be
pulled out after driving; it has dual airbags for comfort among other things.
Ways of analyzing competitor's strengths weaknesses objectives and strategies
Competitor's strategies need to be analyzed by examining the kind of product they offer to the
market (where product on this case refers to the tangible good and the services that are offered
beside it. Thereafter, marketer needs to examine the level of vertical integration adopted by a
given company. These two features form the backbone of any competitors'; strategy. It should be
noted that companies that have these to feature in common also fall under the same group and
will be subjected top the same level of entry barriers. Some companies may be offering a wide
range of products for instance, in the automobile industry, Toyota, Honda, Subaru and Nissan
happen to follow similar product offerings such as the SUVs, Jeeps and others. Additionally,
marketers must ask themselves what kind of services o their competitors offer to attract clientele.
Also, marketers must know the kind of prices offered by their competitors. All these will give a
hint of the kind of strategies adopted by the competitor.
Competitor's objectives are analyzed by the kind of financial approach adopted by a company. If
a company is constantly chasing after profits, then it is likely that the company is in the business on
a short term basis. On the other hand, competitor's objectives are also subject to their history. A
company like Toyota has operated for a long period of time in the automobile industry. In the
mid nineteenth Century, Toyota was responsible fro producing another company called Honda
through one of its workers. During the formative stages of Honda, the company was trying to
fulfill objectives based on its mother company and its competitor's had acknowledged that.
However, after breaking away, the company became independent and its objectives changed.
(Hope, 1997)
Competitor's strengths need to be analyzed through the kind of share that they possess in the
market. If a company has a large share in the market, then chances are that it is a force to reckon
with. For example, in the automobile industry, specifically in the 4WD wagon models, the
company with the largest share is Honda, followed by Toyota, Subaru and Nissan is the newest
candidate in this market segment. Consequently, Honda is the strongest.
Company' strengths and weaknesses can also be analyzed by the kind of images that the draw
from people's minds. For instance, when one is asked to name the most influential firm in a
certain industry, they are likely to mention one particular company; such a company can be
considered as a strong company. Additionally, some companies may be more influential in that
they have the highest form of loyalty from customers. For example, when one is asked what kind
of company they would choose in order to buy a product then most of them will choose a
particular company.
A company's weaknesses may be indicated the nature of its product availability. Additionally, if
the company provides minimal additional services for its products, then chances are that that it
can be considered weak.
How market leaders can expand total market and defend total market share
Market leaders can expand their market share through a number of platforms. They have the
option of using marketing penetration approaches. Here, a company will try to convince the
consumers of other similar products to try their product. On the other hand, companies have the
option of creating a new market segment. By doing this, companies will be approaching
customers that are unaware of the product at all. Lastly, market leaders have the option of
expanding into geographical locations that have never been reached before. (Jaworski &
Rayport, 2001)
Most of the major companies in the automobile industry have applied one of the following
strategies to expand their market share. For instance, Toyota and Honda applied geographical
expansion after starting their operations in Japan. They marketed their vehicles in Asian
countries first and this later on spread to other regions such as the United States and even
Canada. Expansion into markets that have never used company product before can also be quite
rewarding. This can only be achieved after a company has convinced their potential users about
the quality of the brand or product.  On the other hand, companies have the choice of making
their products more convenient and available to their final consumer. For instance, there are
numerous Subaru outlets in its mother country and this has contributed to increased market share
because consumers need to invest too much money in the process of transporting the vehicle.
However, before companies can contemplate expansion, there are a number of issues that need to
be ironed out. For instance, they need to make their share are in line with other players in the
industry. When certain competitors feel threatened by a strong company, they may file legal suits
claiming that their competitor is trying to monopolize the industry. Besides this, sometimes
expanding market share may not be economically feasible especially when economies of scale
do not allow it. In the automobile industry, Nisan Company has been trailing Toyota in term of
new product lines and expansions because of its labor intensive economy. Toyota is quite
efficient at employing technologies in production thus explaining the expansion strategies
characteristic of the latter. (Brown, 1995)
Market leaders can defend their total market here by ensuring that their pricing strategies are
always ahead of the rest. They need o refrain from getting too comfortable with their position in
order to avoid most of the inefficiencies that come with it. Additionally, they also need to be on
the frontline when it comes to product innovations. Other companies should be trying to catch up
with the continuous improvements otherwise market leaders face the danger of being thrown out
of business for becoming complacent. Furthermore, market leaders can defend their place in the
market by establishing a strong distribution line. They need to be constantly looking out for new
market segments in order to expand their products. Also, market leaders can defend their place
by setting the pace in the advertisement and promotion sector. Their promotional efforts need to
be above all the rest in order to have substantial market shares.
How market challengers attack market leaders
Market challenging can work best when the challenger feels that he is bringing a superior
product to the market or if he is convinced that the current market leader is not doing enough to
make the consumer satisfied. Additionally, companies may also decide to establish themselves in
pre-existing markets if they feel that they will employ better methods of production though
technology.
Market challengers have to choose among the following objectives; they could decide to attack
the market leader head on. This direct approach is quite risky but it also has high rewards.
Market challengers using this approach may decide to make new products or they could decide
to improve their products. Another marketing objective for market challengers is trying to attack
opponents that have relatively equal capabilities to them. Lastly, challengers can try attacking
smaller companies at first and then work their way to the top. (Hope, 1997)
After identifying some objectives, challengers then need to identify attacking strategies. They
have the option of using frontal attack where every price, distributional, promotional and product
strategy of the market leader is met head on. On the other hand, challengers can adopt a flank
attack which entails reaching markets that have never been reached before or reaching
geographical areas that competitors have not though of. In the automobile industry, Toyota
applied flank attack by creating cars that use less fuel. Sometimes companies may decide o
choose an encirclement attack where they make contracts with numerous businesses in the
industry. By doing this, a challenger will establish its name slowly but surely. Lastly, companies
may settle on a bypass attack. Such a company can choose to leave the entire market segment
offered by competitors and penetrate easy markets.
After identifying the large strategy, challengers will need to employ smaller strategies. This can
be done by offering price discounts, lower prices, increasing value of goods, making goods more
sophisticated, constant innovation, aggressive advertisements and creating better distribution
channel.
How market followers or niches compete effectively
Market followers stand to loose the moment they try competing directly with the market leaders.
This is because it takes a lot in order to erase some of the images that consumers have about their
favorite companies. Consequently, market followers should try employing differentiation
strategies. Here, they could emphasize on the issue of quality. Additionally they could make their
products easily accessible. (Porter, 1985)
Market followers need to identify gaps that have been left by the major industry players and then
try to fill them the best way possible. On the other hand, market followers need to establish
sound marketing strategies. They need to focus their advertisements and promotions on services
and products that are frequently purchased. Commodities that are not sold on a regular basis will
could be made more expensive in order to earn the company some additional points. It should be
noted that market followers cannot reduce all their prices to match their competitor's but they can
reduce prices of a few and then market those ones aggressively.
Market followers can also compete effectively by adopting cost effective production methods.
This will go along way in enhancing their profit margins. The automobile industry is in serious
need of this strategy. Their profit margins would really increase if they employed better forms of
technology in production. Utilizing such a strategy greatly reduces cost and it also enhances the
quality of the vehicle.
Conclusion
It should be noted that the very definition of a competitor has changed. Firms should keep
abreast of small brands that provide similar goods at lower prices. They should also watch for
expansion strategies among huge companies. As if this is not enough, some competitors may
come in the form of internet dealers. Consequently, competition is a major issue affecting
marketing strategies and companies need to be aware of this. Market followers can adopt leaner
production strategies and reduce prices of common products. Market challengers can use price,
distribution, promotion and product innovation as ways of maintaining competitive advantage.
Reference:
Porter, M. (1985): Competitive advantage, Free Press, p 82-115
Jaworski, B. & Rayport, J. (2001): E-Commerce, McGraw-Hill Publishers, p 53
Brown, S. (1995): Don't innovate, imitate; Sales and Marketing management
Hope, M. (1997): Contrast and Compare, Journal for Mraketing, p 11-13

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