Understanding Market Structures and Competitive Dynamics
Market and Competition
We define the market as a mechanism that encompasses all procurement activities for a particular product or sale by companies and claimants. It forms the basis of market economies and mixed economies, promoting exchange through the free operation of supply and demand.
Perfectly Competitive Markets
A perfectly competitive market is one in which all goods and services are voluntarily exchanged for cash at a price set by the market, resulting from the free functioning of the laws of supply and demand. In this situation, no firm has sufficient capacity to influence the price, so all firms compete on equal terms. Adam Smith described the characteristics of this market.
Imperfectly Competitive Markets
Imperfectly competitive markets are the most common. In this market, one or more companies can influence the price to a greater or lesser extent. The fewer the number of companies, the greater their capacity to influence prices. The models of imperfect competition include:
- Monopoly: Characterized by the absence of competition, with only one firm producing all goods or services, giving it full capacity to influence price or quantity (e.g., tobacco).
- Oligopoly: Few operating businesses, but large enough to affect the price if any of them decides to change its proposal (e.g., petroleum).
- Monopolistic Competition: Many firms offer similar products with the same function. Companies differentiate their products to foster customer loyalty (e.g., detergents).
Criteria for Classifying Markets
The degree of concentration in markets is a key criterion. The higher the concentration of firms, the greater their influence on the price of the goods produced. Other criteria include:
- Degree of Homogeneity: A homogeneous market features interchangeable products with no differences in quality, design, or function (e.g., gasoline).
- Intensity of Competition: Refers to the tension with which various companies fight within the market to sell more.
- Degree of Transparency: The quality of information available to both sellers and buyers regarding the price of all transactions for a certain product.
- Freedom of Entry and Exit: Entering or exiting a market is not easy. Obstacles to accessing or exiting a market where other companies already exist are called barriers.
Market Barriers
Barriers to Entry
Barriers to entry are factors that impede or inhibit new businesses from entering the market. The most common barriers to entry are:
- Cost Advantages: If a company can produce cheaper than any other, it can provide a lower retail price, making it more difficult for new firms to access the market.
- Product Differentiation: Occurs when the design or function of the products are so significant that they retain consumers.
- Capital Requirements: Certain types of markets require significant investments, which can be a barrier to entry (e.g., the economic sector).
Exit Barriers
Exit barriers are the costs any company would incur when leaving a particular market, or losses caused by not recovering part of the investment.
Market Share
The higher the market share, the greater control a company will exercise on the market. The formula is: (Company Sales / Total Sales) * 100.