Lecture 9

Market structure;
and Porter’s 5 forces
model
 Table of content

1. Industry structure
2. Porter’s 5 forces model: applied for
Competitive environment
3. Link to the Requirements of P6 (partially)
(The impacts of competitive environment)
1. Market structure
 Market structure

What is market
structure?
 Market Structures

• Market structure refers to the amount of competition that

exists in a market between producers.
 Market Structures

There are 4 main types

1. Perfect Competition (cạnh tranh hoàn hảo)

2. Monopolistic Competition (cạnh tranh độc quyền)

3. Oligopoly (độc quyền nhóm)

4. Monopoly (độc quyền duy nhất)

Market structures
 Market structure

Perfect competition
market
 Characteristics of Perfect
competition
A perfect competitive market must have the following characteristics:

• Many buyers and sellers

• The good being sold is homogeneous (hàng hóa đồng nhất)

• Perfect knowledge: for both buyers and sellers

• Perfect mobility: resources and consumers

• No barriers to entry or exit

 Homogeneous products

• A homogeneous product is one that is indistinguishable from

competing products of different suppliers.

• The product has essentially the same physical characteristics

and qualities as products from other suppliers.

• One product can easily be substituted for another.

Source: https://vietnambiz.vn/san-pham-dong-nhat-homogeneous-product-la-gi-hieu-ve-san-pham-dong-nhat-20200415104316443.htm
Fruits and Vegetable
market are goods
examples of perfect
competition

Source: https://www.bodrumpeninsulatravelguide.co.uk/yalikavak-weekly-market-2/
 Examples: Fruit and vegetable markets

Source: https://vov.vn/suc-khoe/xanh-va-do-tao-nao-tot-hon-821169.vov
 Perfect competition
IMPLICATIONS OF PERFECT COMPETITION

Extent of market power

The firms have no market power at all

Price There will only be one price of good → firm = price taker

Advertising There will be no advertising since everyone has the same knowledge

There can be no abnormal profits, except possibly in the very short run if a producer
Profitability
reduces price and captures a larger share of the market.
 Market structure

Monopolistic
competition market
(Cạnh tranh độc quyền)
 Monopolistic Competition

Market structure of monopolistic competition exists when all

of the conditions for perfect competition are met except for
the existence of a homogeneous good
 Monopolistic Competition

• Each firm has a monopoly over its own good but there is a
great deal of competition in the market from other
suppliers producing very similar products
 The goods in Monopolistic Competition

• The goods is slightly differentiated in some way: either by

advertising, branding or local productions

• There does not have to be technical differences, but there must

be “economic difference”.

• There is also some degree of consumers loyally

• Abnormal profit is accepted in short run.

 Monopolistic competition

IMPLICATIONS OF MONOPOLISTIC

Extent of market power The firms have no market power at all

Price There will be small differences in price.

Advertising There will be heavy advertising and branding.

Small abnormal profits can exist in the short run but will be competed away in the
Profitability
longer run.
 Examples: Paint industry

Source: https://vov.vn/suc-khoe/xanh-va-do-tao-nao-tot-hon-821169.vov
 Examples: Detergents

Specific explanation of
the example of
Detergents:
https://vietnambiz.vn/canh-tranh-doc-
quyen-monopolistic-competition-la-gi-vi-
du-ve-canh-tranh-doc-quyen-
20191028110355692.htm

Source: https://vov.vn/suc-khoe/xanh-va-do-tao-nao-tot-hon-821169.vov
 Market structure

Oligopoly market
(Độc quyền nhóm)
 Oligopoly

Oligopoly is where a small number of producers supply a

market in which the product is differentiated in some way.
 Characteristics of
Oligopoly
Here are some characteristics of oligopoly:
• A great deal of interdependence between the firms

• A lack of price competition in the market: price determination

• Different forms of non-price competition take place, such as branding or

advertising
 Characteristics of
Oligopoly
Here are some characteristics of oligopoly:
• Price is determined by either price leadership or collusion:

✓ Price leadership: one firms take the leadership in setting price and others
follow suit.

✓ Conclusion: is an explicit or implicit agreement between firms on prices.

 Oligopoly

IMPLICATIONS OF OLIGOPOLY

Extent of market power

A great deal of market power.
(Firm’s)

Price A stable price level. Prices set by price leadership or collusion

Advertising Much advertising and branding. Non-price competition is common

Profitability Abnormal profits can exist, their extent depends on the strength of competitors.
 Example of Oligopoly

• Vietnamese example
• United States’ telecommunication market
• Chinese automobile market
Example of
Oligopoly: Petrol in
Vietnam 2020

Source: https://www.statista.com/statistics/811633/petroleum-market-share-by-brand-vietnam//
 Example of Oligopoly:
Automobile
manufacturers in
Vietnam 2020

Source: https://www.statista.com/statistics/976550/vietnam-automobile-manufacturers-market-share/
 Market structure

Monopoly market
(Độc quyền duy nhất)
 Monopoly

• In its purest form a monopolistic market is one in which

there is no competition at all; there is a single producer

supplying the whole market.

 Characteristics of Monopoly

• Power depends on the availability of substitute and barriers to entry

• Firm can charge different price for the same good

• A monopolist could also be a group of producers acting together to

control supply to the market: for example, a cartel (thỏa thuận cạnh tranh)
such as OPEC

• Price discrimination: different demand + same good = different price

 Monopoly

IMPLICATIONS OF MONOPOLY

Extent of market power

The firm has absolute market power

There will only be one price for the good, except in the case of price discrimination →
Price
The firm = “price maker”

Advertising No advertising because there is only one firm producing the good

Abnormal profits can exist in the long run as there is no competition which might
Profitability
erode them away.
 Example of Monopoly: OPEC

Source: https://www.dw.com/en/opec-saudi-arabia-russia-united-states-peak-oil-covid-19/a-54875289
 Monopoly in Vietnam by
State

According to Decree 94/2017/NĐ-CP:

https://luatvietnam.vn/doanh-nghiep/danh-sach-20-nganh-nghe-nha-
nuoc-doc-quyen-kinh-doanh-561-19571-article.html
 Summarize
Perfect Monopolistic
Oligopoly Monopoly
competition competition

Market power None Little High Absolute

Small differences in Price discrimination

Price One price One price
price possible

Advertising None High High None

Only normal profit in

Profitability Only normal profit Abnormal profit Abnormal profit
long run
2. Porter’s 5 forces model:
applied for competitive
environment
2.1 Micro environment:
competitive environment
 Types of Environment
Macro environment

<TITLE>
Economic (PESTLE) Non-economic

Internal
environment
The company
External
environment
Customers

Suppliers
Micro environment
(Competitive environment) Public
Competitors
Marketing
intermediaries
38
 Two levels of environment

Macro Micro
environment environment
 Immediate environment

• The immediate (or operational) environment for most

firms includes suppliers, competitors, labor markets,

financial institutions and customers, and may also include

trade associations, trade unions and possibly a parent

company.
2.2 Porter’ 5 forces model
 Porter’s five-forces model

• Porter’s model says that the structure of an industry and

the ability of firms in that industry to act strategically
depend upon the relative strengths of five forces
 Porter’s five-forces model

1. Potential competition (aka. Threat of new entrants)

2. Current competition (aka. Industry rivalry)

3. Threat of substitute products

4. The power of suppliers

5. The power of buyers

 5 forces model
Barriers to entry/exit
(potential competitors)

Threat of Industrial rivalry

substitute (Current
YOUR competitors)
COMPANY’s
product

Buyer’s power
Supplier’s power
(Customer’s power)
 5 forces model

Potential
competition
 Potential competition

• Barriers to entry are any barriers which prevent or inhibit

the entry of firms into the industry.

• Barriers to exit are those prevent exit from an industry,

mostly it relates to the cost of leaving the industry.
Examples of barriers to entry/exit are: Economies of scale, legal, advertising, financial,
technical etc. …
 Potential competition

• Barriers to entry are any barriers which prevent or inhibit

the entry of firms into the industry.

• Barriers to exit are those prevent exit from an industry,

mostly it relates to the cost of leaving the industry.
Examples of barriers to entry/exit are: Economies of scale, legal, advertising, financial,
technical etc. …
 Potential competition

• A contestable market (thị trường không ổn định): no barrier to entry

or exit: perfect or imperfect competition, the firm behave

in competitive way.

• Examples of barriers to entry/exit are: Economies of

scale, legal, advertising, financial, technical etc. …

 5 forces model

Current competition
 Current competition

• Current competition will affect firm’s strategy

For example:

• Oligopoly → differentiation strategy

• Perfect competition → cost leadership strategy

 5 forces model

Threat of substitute
 Threat of substitute
products
• This threat largely depends upon the nature of the good
being traded in the market and the extent of product
differentiation.
 Threat of substitute
products
• If one good has no substitute, the producer of that good
will face little competition → more market power

• A lot of attempt at differentiation are designed to reduce

the threat from substitute products

Example: tap water and Pepsi

 5 forces model

Power of Suppliers
 The power of suppliers

• The power of suppliers over the firm is likely to be

extremely important in certain markets, depending upon
the nature of the product being supplied (whether it is
highly specialized or not)
 The power of suppliers

• If firm can produce the components it needs → suppliers’

powers will be greatly reduced

• Switching cost concept: if the cost of switching suppliers

is low → suppliers has weaker power
 5 forces model

Power of Buyers
 The power of Buyers

• Markets will range from those with many buyers

(retailing) through those with small number of buyers (car

and parts manufacturers)

 The power of Buyers

• Market with small number of buyers → buyers have

higher market power

• Monopsony market (Độc quyền mua): Buyer who has great

deal of market than the seller. E.g: coal industry

 The power of Buyers

• Buyer’s power can be enhanced by watchdog agency (cơ

quan giám sát)

• Existing customers is important to the firms (tobacco,

alcohol)
Michael Porter’s five forces analysis of
Vinamilk
 Specific examples with tobacco
industry in the UK

• Case study: in page 384- 386, Ian Wortthington, Chris

Briton, Ed Thompson, The Business Environment, A
global Perspective, 8th ed, 2018, Pearson.
 5 forces model

Practice with the

selected company
THE END