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Market Structure and Industry Analysis
Philippine UNY
Study Guide, Definition, and Notes
Market Structure
Market: refers to any place or progress involved with the exchange of goods and services.
There are 4 basic types of market by traditional economic analysis.
4 Basic Types of Market
o Perfect Competition o Monopolistic Composition o Oligopoly o Monopoly
Perfect Competition: is characterized by many buyers and sellers, many products that are
similar in nature and, as a result, many substitutes.
Main Characteristic of Perfect Composition
o There is perfect knowledge, with no information failure or time lags in the flow information o Given that producers and consumers have perfect knowledge, it is assumed that they make rational decisions to maximize their self-interest. o There are no barriers to entry in or exit out of the market o Firms produce homogeneous, identical, units of output that are not branded. o Each unit of input, like labor, is also homogeneous. o No single firm can influence the market price, or market conditions. o There are very many firms in the market which are too many to measure. As a result of no barriers to entry. o There is no need for government regulation except to make markets more competitive. o There are assumed to be no externalities. o Firms can make abnormal profits in the short run.
Equilibrium: in perfect competition is the point where market demands will be equal market
supply. A firm’s price will be determined at this point. In the short run, Equilibrium will be affected by demand. In the long run, both demand and supply of a product will affect the equilibrium in perfect competition. A firm will receive only normal profit in the long run at the equilibrium pint. (BEBRUE,
Monopolistic Competition: occurs when a large number of firms price and sell differentiated
products that are close substitute to each other.
Features of Monopolistic Competition
o Many Firms: There is relatively large number of firms in the market. Such firms produce close
substitute and compete with each other. Stiff competition exists between firms and they share market demand
o Product Differentiation: The products produced are not identical. They are slightly different
from each other. Despite this, they remain close substitutes therefore, their prices are similar.
o Freedom of entry and Exits: As in perfect competition, Businesses have freedom to enter and
exit an industry. When existing firms make super profits, the new firms enter the industry to produce close substitutes and exit once these super profits are no longer available. Because of this in the market earn normal profits in the long run.
o Non- Price competition : Business use means other than price to complete. This is a common
feature in monopolistic competition, so companies spend amount of money.
Oligopoly: is a market dominated by a few large firms. It falls between a monopoly and
monopolistic competition. In this market, a small number of firms account for a large proportion of output and employment.
Features of Oligopoly Market
o A relatively small number of firms in the industry that dominate the market o Differentiated products o Mutual interdependence of businesses o Relatively high barriers to entry due to economics of scale o Businesses in the market earn super profits in the long run
Monopoly: a single producer or seller of a product that has no close substitutes controls the
market. This is the competitive situation, so it is very hard for a true monopoly to exist. A monopolist has no competitors
Features of Monopoly
Strong barriers to entry, it is usually very difficult to keep others out of market which is capable of earning super profit, such as a monopoly. o Imperfect Knowledge o No advertising. There is no need to defer customers away from a competitor, as there is no close substitute good or service. o One seller
e) Threats of substitute goods/ service: The industry is always competing with another
industry producing a similar substitute product. Hence, all firms in an industry have potential competitors from other industries.
Broad Factors Analysis (PEST Analysis)
: Commonly called the PESST Analysis is a key component of external analysis. A Broad Factors Analysis Assesses and summarizes the four macro-environment factors-political, economic, socio- demographic (social), technological : These factors have significant impacts on a business’s operating environment, posing opportunities and threats to the company and all of its competitors. : Broad Factors Analysis is widely used in strategies analysis and planning because it helps companies determine the risks and opportunities in the marketplace. That, in turn, becomes an important consideration when companies are developing corporate and business strategies
a. Political factor: Political factors are factors within the regulatory environment of a
particular industry or business
Example:
o Barriers to international trade o Changes in government regulation o Tax policy o Employment laws o Country-specific political risk
b. Economic Factor: Economic factors are things that influence the macro economy, such as:
o Interest rates o Foreign exchanging rates o inflation o Gross Domestic Product (GDP) growth rates
c. Socio- Demographic (Social) Factors: are short for social and demographic factors, which
concern population demographics and characteristics of a company’s target customers.
Example:
o Population Growth o Education level o Health consciousness and trends o Nature and the environment o Age cohort changes
d. Technological Factors: have become increasingly important for many businesses in recent
years due to prevalence of information technology and mobile devices.
Example:
o Research & development (R&D) investment o Scientific advances o Emerging Technologies o Diffusion of Technologies
SWOT Analysis
: Stand for Strengths, Weakness, Opportunities, and Threats. It can be a great way of summarizing various industry forces and determining their implications for the business in question. : Is one of the most commonly used tools to assess the internal and external environments of a company and is part of a company’s strategies planning process. : Can be done for product, place, industry, or person, A SWOT analysis helps with both strategic planning and decision-making, as it introduces opportunities to the company as a forward- looking bridge to generating strategic alternatives
SWOT Analysis- internal and external factors
2 categories of SWOT Analysis
- Internal Factors
- External Factors It’s important to point out that strength and weaknesses are current or backward-looking, a opportunities and threats are forward-looking. By performing a SWOT analysis, we will be able to build bridge between what the company has accomplished to date and the strategic alternatives that are going to be generated.
Internal Factors: are the strengths and weaknesses of the company. Strengths are the characteristics
that give the business its competitive advantages, while weaknesses are characteristics that a company needs to overcome in order to improve its performance.
Examples:
o Company Culture o Company Image o Operational Efficiency o Operational Capacity o Brand Awareness o Market share
