1.

Types of Market Structures

There are four basic types of market structures.

Pure Competition

Pure or perfect competition is a market structure defined by a large number of small firms competing against each other. A
single firm doesn’t have significant marketing power, and as a result, the industry produces an optimal level of output because
firms don’t have the ability to influence market prices. Supply and demand determine the amount of goods and services
produced, along with the market prices set by the companies in the market. Products are identical to competitors’ products,
and there are no significant barriers to entering and exiting the market.

The pure competition market structure is rare in the real world. This is a theoretical model that is helpful when looking at
industries with similar characteristics. In other words, it’s a good reference point for other market structures. The best
examples of pure competition market structures are stock, agricultural and craft markets.

Monopolistic Competition

Like pure competition, monopolistic competition is a market structure referring to a large number of small firms competing
against each other. However, firms in monopolistic competition sell similar but highly differentiated products. Lowest possible
cost production, which leads to optimal output in a pure competition market structure, is not assumed.

These factors give firms in a monopolistic competition market power to charge higher prices within a certain range. The
products are remarkably similar, but small differences become the basis for firms’ marketing and advertising. Differentiation
can include style, brand name, location, packaging, advertisement, pricing strategies and more.

Examples include fast food restaurants, clothing stores, breakfast cereal companies, service and repair markets, tutoring
companies and beauty salons and spas. Products and services at a beauty salon are quite similar, but these companies will use
certain value propositions, such as quality of services and appealing pricing, to draw more customers. They may even advertise
brand-name beauty products that are themselves in monopolistic competition — there is little that separates makeup and hair
products, as far as what constitutes these products and their use.

Producers freely enter the market when profits are attractive. There is easy entry and exit in monopolistic competition.

Oligopoly

An oligopoly is dominated by a few firms, resulting in limited competition. They can collaborate with or compete against each
other to use their collective market power to drive up prices and earn more profit.

Entering into an oligopoly is difficult. The most powerful companies have control over raw materials, patents and financial and
physical resources that create barriers for potential entries. This is what helps set high prices. However, if prices are too high,
buyers will head to product substitutes in the market.

Products may be homogenous or differentiated. Typically, there are three to five dominant firms, but this number can vary
depending on the market. For instance, video gaming consoles are an oligopoly with three companies — Microsoft, Sony and
Nintendo — dominating the market. Other examples of oligopolies are the automobile and gasoline industries.

Pricing, profits and production levels change as the dynamic relationship between sellers and buyers changes.
Pure Monopoly

A monopoly exists when there’s a single firm that controls the entire market. The firm and industry are synonymous. This firm is
the sole producer of a product, and there are no close substitutes. Because there are no alternatives, the firm has the highest
level of market power. Hence, monopolists often reduce output, increase prices and earn more profit.

Entry or exit is blocked in a pure monopoly. This can occur for more than one reason, as seen in two of the best examples for
pure monopolies: public utilities and professional sports leagues.

Public utilities are considered natural monopolies because they have economies of scale — a firm receives certain cost
advantages due to its size — in an extreme way. New firms cannot start up because it would be incredibly expensive to reach
scale in a short amount of time. Building a maze of pipes and wires to be able to compete with the firm would require a lot of
capital, and there would be legal barriers to entry. That’s why there are typically government monopolies (or government
regulations) for natural monopolies.

Professional sports leagues control player contracts and have leases on major city stadiums and arenas. It would take a
substantial amount of capital to lure away top talent and secure a large enough place to showcase that talent, if someone
wanted to start a professional sports league. Plus, there are broadcasting rights and more at play. For example, for the 2017-
2018 season, 37 players in the NBA will earn $20 million or more in salary alone. New arenas in the league cost in the
neighborhood of $500 million. Television rights for the NBA were extended in February 2016 with ESPN and TNT for a value of
about $2.66 billion per year.

2. Product Life Cycle

What Is a Product Life Cycle?

The term product life cycle refers to the length of time a product is introduced to consumers into the market until it's removed
from the shelves. The life cycle of a product is broken into four stages—introduction, growth, maturity, and decline. This
concept is used by management and by marketing professionals as a factor in deciding when it is appropriate to increase
advertising, reduce prices, expand to new markets, or redesign packaging. The process of strategizing ways to continuously
support and maintain a product is called product life cycle management.
How Product Life Cycles Work

Products, like people, have life cycles. A product begins with an idea, and within the confines of modern business, it isn't likely
to go further until it undergoes research and development (R&D) and is found to be feasible and potentially profitable. At
that point, the product is produced, marketed, and rolled out.

As mentioned above, there are four generally accepted stages in the life cycle of a product—introduction, growth, maturity,
and decline.

Introduction: This phase generally includes a substantial investment in advertising and a marketing campaign focused on
making consumers aware of the product and its benefits.

Growth: If the product is successful, it then moves to the growth stage. This is characterized by growing demand, an increase in
production, and expansion in its availability.

Maturity: This is the most profitable stage, while the costs of producing and marketing decline.

Decline: A product takes on increased competition as other companies emulate its success—sometimes with enhancements or
lower prices. The product may lose market share and begin its decline.

When a product is successfully introduced into the market, demand increases, therefore increasing its popularity. These newer
products end up pushing older ones out of the market, effectively replacing them. Companies tend to curb their marketing
efforts as a new product grows. That's because the cost to produce and market the product drop. When demand for the
product wanes, it may be taken off the market completely.

The stage of a product's life cycle impacts the way in which it is marketed to consumers. A new product needs to be explained,
while a mature product needs to be differentiated from its competitors.

3. Impact of Product Life Cycle on sources of Competitive Advantage.

Some firms are able to sustain their competitive advantage for many years,28 but most find that competitive advantage erodes
over time. In his book Hypercompetition, D’Aveni proposes that it is becoming increasingly difficult to sustain a competitive
advantage for very long. “Market stability is threatened by short product life cycles, short product design cycles, new
technologies, frequent entry by unexpected outsiders, repositioning by incumbents, and tactical redefinitions of market
boundaries as diverse industries merge.”29 Consequently, a company or business unit must constantly work to improve its
competitive advantage. It is not enough to be just the lowest-cost competitor. Through continuous improvement programs,
competitors are usually working to lower their costs as well. Firms must find new ways not only to reduce costs further but also
to add value to the product or service being provided.