Name: Vivero, Melissa Jane D.

Course: BSA II

The Four Types of Market Structures

1. Perfect Competition

Perfect competition describes a market structure, where a large number of small firms compete against
each other. In this scenario, a single firm does not have any significant market power. As a result, the
industry as a whole produces the socially optimal level of output, because none of the firms can
influence market prices.

The idea of perfect competition builds on several assumptions: (1) all firms maximize profits (2) there is
free entry and exit to the market, (3) all firms sell completely identical (i.e., homogenous) goods, (4)
there are no consumer preferences. By looking at those assumptions, it becomes quite obvious that we
will hardly ever find perfect competition in reality. That is an essential aspect because it is the only
market structure that can (theoretically) result in a socially optimal level of output.

Probably the best example of a market with an almost perfect competition we can find in reality is the
stock market. If you are looking for more information on perfect competition, you can also check our
post on perfect competition vs. imperfect competition.

2. Monopolistic Competition

Monopolistic competition also refers to a market structure, where a large number of small firms
compete against each other. However, unlike in perfect competition, the firms in monopolistic
competition sell similar, but slightly differentiated products. That gives them a certain degree of market
power, which allows them to charge higher prices within a certain range.

Monopolistic competition builds on the following assumptions: (1) all firms maximize profits (2) there is
free entry, and exit to the market, (3) firms sell differentiated products (4) consumers may prefer one
product over the other. Now, those assumptions are a bit closer to reality than the ones we looked at in
perfect competition. However, this market structure no longer results in a socially optimal level of
output because the firms have more power and can influence market prices to a certain degree.

An example of monopolistic competition is the market for cereals. There is a huge number of different
brands (e.g., Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Most of them probably taste
slightly different, but at the end of the day, they are all breakfast cereals.

3. Oligopoly
An oligopoly describes a market structure that is dominated by only a small number of firms. That
results in a state of limited competition. The firms can either compete against each other or collaborate
(see also Cournot vs. Bertrand Competition). By doing so, they can use their collective market power to
drive up prices and earn more profit.

The oligopolistic market structure builds on the following assumptions: (1) all firms maximize profits, (2)
oligopolies can set prices, (3) there are barriers to entry and exit in the market, (4) products may be
homogenous or differentiated, and (5) there is only a few firms that dominate the market.
Unfortunately, it is not clearly defined what a “few firms“ means precisely. As a rule of thumb, we say
that an oligopoly typically consists of about 3-5 dominant firms.

To give an example of an oligopoly, let’s look at the market for gaming consoles. This market is
dominated by three powerful companies: Microsoft, Sony, and Nintendo. That leaves all of them with a
significant amount of market power.

4. Monopoly

A monopoly refers to a market structure where a single firm controls the entire market. In this scenario,
the firm has the highest level of market power, as consumers do not have any alternatives. As a result,
monopolies often reduce output to increase prices and earn more profit.

The following assumptions are made when we talk about monopolies: (1) the monopolist maximizes
profit, (2) it can set the price, (3) there are high barriers to entry and exit, (4) there is only one firm that
dominates the entire market.

From the perspective of society, most monopolies are usually not desirable, because they result in lower
outputs and higher prices compared to competitive markets. Therefore, they are often regulated by the
government. An example of a real-life monopoly could be Monsanto. This company trademarks about
80% of all corn harvested in the US, which gives it a high level of market power. You can find additional
information about monopolies in our post on monopoly power.

Product life cycle

1. Development

The development stage of the product life cycle is the research phase before a product is introduced to
the marketplace. This is when companies bring in investors, develop prototypes, test product
effectiveness, and strategize their launch. Due to the nature of this stage, companies spend a lot of
money without bringing in any revenue because the product isn't being sold yet.
This stage can last for a long time, depending on the complexity of the product, how new it is, and the
competition. For a completely new product, the development stage is hard because the first pioneer of a
product is usually not as successful as later iterations.

2. Introduction

The introduction stage is when a product is first launched in the marketplace. This is when marketing
teams begin building product awareness and reaching out to potential customers. Typically, when a
product is introduced, sales are low and demand builds slowly.

Usually, this phase is focused on advertising and marketing campaigns. Companies build their brand,
work on testing distribution channels, and try to educate potential customers about the product. If
those tactics are successful, the product goes into the next stage — growth.

3. Growth

During the growth stage, consumers have accepted the product in the market and customers are
beginning to truly buy-in. That means demand and profits are growing, hopefully at a steadily rapid
pace.

The growth stage is when the market for the product is expanding and competition begins developing.
Potential competitors see success and want in. During this phase, marketing campaigns often shift from
getting customers to buy-in to the product to establishing a brand presence so consumers choose them
over developing competitors.

Additionally, as companies grow, they'll begin to open new distributions channels and add more
features and support services.

4. Maturity

The maturity stage is when the sales begin to level off from the rapid growth period. At this point,
companies begin to reduce their prices so they can stay competitive amongst growing competition.

This is the phase where a company begins to become more efficient and learns from the mistakes made
in the introduction and growth stages. Marketing campaigns are typically focused on differentiation
rather than awareness. This means that product features might be enhanced, prices might be lowered,
and distribution becomes more intensive.

During the maturity stage, products begin to enter the most profitable stage. The cost of production
declines while the sales are increasing.

5. Saturation

During the product saturation stage, competitors have begun to take a portion of the market and
products will experience neither growth nor decline in sales.
Typically, this is the point when most consumers are using a product, but there are many competing
companies. At this point, you want your product to become the brand preference so you don't start to
enter the decline stage.

Again, marketers need to focus on differentiation in features, brand awareness, price, and customer
service. The competition reaches its apex at this stage.

6. Decline

Unfortunately, if your product doesn't become the preferred brand in a marketplace, you'll typically
experience a decline. Sales will decrease during the heightened competition and are hard to overcome.

Additionally, consumers might lose interest in your product as time goes on, just like the CD example I
mentioned earlier.

If a company is at this stage, they'll either discontinue their product, sell their company, or innovate and
iterate on their product in some way.

To extend the product life cycle, successful companies can implement new advertising strategies, reduce
their price, add new features to their increase value proposition, explore new markets, or adjust brand
packaging

Impact of Product Life Cycle on sources of competitive advantage

* A product life cycle is extensively used by the organizations to understand and estimate the
performance of a product in the market. The company can benefit in the followings ways from a product
life cycle.

* Easy Sales Forecasting: The product life cycle is an estimation of the sales which the product will be
able to make in its life span.

* Competitive Advantage: Analyzing the life of a product in the market and framing the strategies
accordingly, helps the company to face competition.

* Defined Strategies: If the company is aware of the product’s future performance, the company can
determine and plan the strategies in the long run.
* Decision Making: To make crucial decisions related to the product such as product development or
improvement, product life cycle analysis is essential.

* Marketing Target and Positioning: Product life cycle provides for targeting the right audience and
establishing the brand image of the product.

Porter's competition model

1. Competitive rivalry

This force examines how intense the competition is in the marketplace. It considers the number of
existing competitors and what each one can do. Rivalry competition is high when there are just a few
businesses selling a product or service, when the industry is growing and when consumers can easily
switch to a competitor's offering for little cost. When rivalry competition is high, advertising and price
wars ensue, which can hurt a business's bottom line.

2. The bargaining power of suppliers

This force analyzes how much power a business's supplier has and how much control it has over the
potential to raise its prices, which, in turn, lowers a business's profitability. It also assesses the number
of suppliers of raw materials and other resources that are available. The fewer supplier there are, the
more power they have. Businesses are in a better position when there are multiple suppliers.

3. The bargaining power of customers

This force examines the power of the consumer, and their effect on pricing and quality. Consumers have
power when they are fewer in number but there are plentiful sellers and it's easy for consumers to
switch. Conversely, buying power is low when consumers purchase products in small amounts and the
seller's product is very different from that of its competitors.

4. The threat of new entrants

This force considers how easy or difficult it is for competitors to join the marketplace. The easier it is for
a new competitor to gain entry, the greater the risk is of an established business's market share being
depleted. Barriers to entry include absolute cost advantages, access to inputs, economies of scale and
strong brand identity.
5. The threat of substitute products or services

This force studies how easy it is for consumers to switch from a business's product or service to that of a
competitor. It examines the number of competitors, how their prices and quality compare to the
business being examined, and how much of a profit those competitors are earning, which would
determine if they can lower their costs even more. The threat of substitutes is informed by switching
costs, both immediate and long-term, as well as consumers' inclination to change.