Muravitskaya Anna IB-412 MARKET STRUCTURE AND COMPETITION In financial terms a market is the interaction of offers to buy ("bids")

and offers to sell ("asks"). Physical location is a detail, and the market may not have a single locationbuyers and sellers may never meet face to face. The critical component is the e istence of the offers. !ccording to the character of the concluded contracts markets can be spot markets (the buying and selling goods, currency or securities that are available for the immediate delivery), and futures markets (the buying and selling goods, currency or securities for delivery at a future date for the price fi ed in advance) !nother common grouping is by the function e ercised. "ommodity markets# e changes $tock markets %oreign e change markets Commodity markets are places &here ra& materials and some manufactured goods are bought and sold for immediate or future delivery. 'ain terminal markets are situated in (ondon and )e& *ork. Stock markets is a part of the broader securities market. It may be classified by role into primary and secondary markets. The primary market is the process by &hich ne& securities are issued and marketed. The process of selling stock to the general public for the first time is called an initial public offering (IP+). !fter the distribution period, trading of the issue among investors is referred to as the secondary market. Foreign e c!ange markets are the markets &here foreign currencies are traded. In most markets, regardless their classification bases, there is a definite market "eader, the firm &ith the largest share on the market. This is often the first company to have entered the field, or at least the first to have succeeded in it. The market leader is fre-uently able to lead other firms in the production of ne& products, in price changes, in the level or intensity of promotions. 'arket leaders usually &ant to increase their market share even further, or at least to protect their current market share. In many markets there is often a distinct market c!a""enger, &ith the second. largest market share. They usually either attempt to attack a leader, or to increase their market share by attacking various market follo&ers.

The ma/ority of the companies in any industry are merely market fo""o#ers &hich present no threat to the leader. 'any market follo&ers are concentrated on market segmentation, finding a profitable niche in the market &hich is not satisfied by other goods or services, and that offers gro&th potential or gives the company the differential advantage because of its specific competencies. ! market follo&er &hich does not establish its o&n niche is in vulnerable position, if its product does not have a uni$ue se""ing proposition, there is no reason for anyone to buy it. !lthough small companies are -uite fle ible and can -uickly respond to the change of the market conditions, their narro& range of customers causes problematic fluctuations in profit and turnover. %S& is a marketing concept &hich &as first proposed as a theory to e plain a pattern among successful advertising campaigns of the early 0123s. It states that such campaigns made uni-ue propositions to the customer and that this convinced them to s&itch brand. Today a number of business corporations use 4$P on the follo&ing bases, 0. 5ach advertisement must make a proposition to the customer, 67uy this product and you &ill get $+'5T8I)9: ;. The proposition itself must be uni-ue <. The proposition must be strong enough to pull ne& customers to the product. !n important strategic thinker 'ichael Porter in his books, outlines the five competitive forces at &ork in any industry, (0) rivalry among e isting firms, as inter.firm competition affects prices, advertising and sales budgets, and so on= (;) the threat of ne& entrants and ne& competitors in an industry as it limits the prices a company can charge, and often results in e pensive investment designed as a deterrent= (<) the threat of substitutes as the possibility of consumers s&itching to cheaper substitute products limits prices= (2) the bargaining po&er of buyers because the po&er of large buyers such as retail chains also limits prices, and (>) the bargaining po&er of suppliers as po&erful suppliers determine the cost of ra& materials. In economics, market structure (also kno&n as market form) describes the state of a market &ith respect to competition. &erfect competition. There are large numbers of firms or suppliers. 5ach of these firms supplies only a small portion of the total output for the industry and individual firm has no control over the price of the product it sells. !ll buyers and sellers in the market are effectively price takers, not price makers. 4nder perfect competition, all firms in the industry sell identical products. )e& firms can enter relatively easily. In these cases, barriers to entry are considered lo&, as only a small investment may be re-uired to enter the market.

There is no non.price competition under perfect competition. Monopo"istic competition. 'any industries that &e often deal &ith have market structures that are monopolistic competition or oligopoly. ?etail stores (&ith many stores and differentiated products) provide an e ample of monopolistic competition. !s in the case of perfect competition, monopolistic competition is characteri@ed by the e istence of many sellers. 8o&ever, the number of firms must be large enough that each firm in the industry can e pect its actions go unnoticed by rival firms. 4nlike perfect competition, the products of these firms are not considered identical. There are large numbers of firms or suppliers. 5ach of these firms supplies only a small portion of the total output for the industry ! firm under monopolistic competition or oligopoly has some control over the price of the product it sells and make considerable use of instruments of non.price competition. '"igopo"y. !n important characteristic of an oligopolistic market structure is the interdependence of firms in the industry. !n oligopolistic industry is also typically characteri@ed by economies of scale. In oligopoly, there are only a fe& (presumably more than t&o) suppliers of the product. Ahen there are only t&o sellers of the product, the market structure is often called duopoly.There is some control over the price of the product it sells. 4nder an oligopolistic market structure, firms may produce differentiated or identical products. In oligopoly, barriers to entry is considered very highhuge amounts of investment, determined by the very nature of the product and the production process, are needed to enter these markets. +ligopolistic firms also make heavy use of non.price competition. Monopo"y. It is a market form in &hich there is only one seller. ! monopoly firm is deemed to have considerable control over the price of its product.In the case of a monopoly, product differentiation is not truly an issue, as there is only one firmthere are no other firms from &hom it should differentiate its product. 'onopoly constitutes the e treme case &here the entry of ne& firms is blocked, usually by la&. If for &hatever reasons, ne& firms are allo&ed to enter a monopolistic market structure, it can no longer be termed a monopoly.

Ahile a monopolist also utili@es instruments of non.price competition, such as advertising, these are not designed to compete &ith other firms, as there are no other firms in the monopolistBs industry. &ure monopo"y. &hen only one company supplies to the market. (atura" monopo"y-&hen a monopoly occurs due to economies of scale )ega" monopo"y-&hen a monopoly occurs due to government control State monopo"y-&hen government make one company the only legal supplier +ftentimes economists operate &ith the term monopsony, &here there is only one *uyer.!n industry characteri@ed by a monopolistic market structure produces less output and charges higher prices than under perfect competition (and presumably under monopolistic competition). Thus, on the basis of price charged and -uantity produced, a monopoly is less desirable socially. 8o&ever, a natural monopoly is generally considered desirable if the monopolistBs price behavior can be regulated. +uopsony is a market that only features t&o buyers of goods or services, suggesting the buyers have an ability to influence the prices paid to suppliers. '"igopsony is a market form in &hich the number of buyers is small &hile the number of sellers in theory could be large. This typically happens in a market for inputs &here numerous suppliers are competing to sell their product to a small number of (often large and po&erful) buyers. It contrasts &ith an oligopoly, &here there are many buyers but fe& sellers.