Both economists and marketers define market structure, but each defines the term a bit differently. Economists look at the overall market structure with the goal of defining and predicting consumer behavior. Marketing managers seek to define market structure to create competitive strategies as part of an overall marketing plan. In both cases, managers define market structure with the understanding that market structure is fluid. What the market looks like today, and what it looks like tomorrow, may be two completely different pictures.
Economists Define Market Structure
Economists examine market structure to help with decision-making. Economists seek to analyze broad trends to understand consumer motivation. While marketers also look at this too, economists tend to focus on the big picture. They want to know how this information affects large segments of the population. Marketers are keen to understand the information and apply it to their particular product, company, or marketing situation.
The Four Major Market Structures
Talk to an economist and she'll define market structure according to how the industry serving the market is arranged. In economics, there are four general market structures.
These four are:
- Monopoly: A monopoly exists when one company and one only provides services in a particular industry, or one company dominates and consumers cannot substitute anything that comes close. Today, very few industries are monopolies. Utility companies such as water companies or electric companies may be considered monopolies. Consumers can't exactly substitute something else for electricity from the local provider, unless they switch to firewood and candles!
- Oligopoly: An oligopoly consists of only a handful of companies selling similar products. Consumers can substitute products, but only one company's offerings for another. An example would be the three big American car companies of today: Ford, GM and Chrysler.
- Monopolistic Competition: In monopolistic competition, many sellers sell different products. It's very similar to competition, below, with the exception that the products themselves are a bit different from one another, so consumers look for those differences rather than price differences. An example is the restaurant industry. Anyone can obtain the proper permits, licenses and such and open a restaurant offering any cuisine or food in the world. Whether the restaurant is successful or not depends upon whether or not consumers like the food, service, décor, location, and all the other factors that make restaurants successful.
- Competition: In markets with perfect competition, there are no barriers to entry, and many offering different goods. Consumers often shop on price differences alone. Wal Mart may be viewed as a purely competitive company within the grocery industry for its super centers that offer lower prices than competing grocery chains.
Marketers and Market Structures
Marketing managers define market structure a little differently than economists. While knowing if their industry is an oligopoly or a purely competitive environment is important, marketers dig deeper into the industry, searching for the market structure to understand the competition and customer behavior.
Market Structure and Competition
Understanding the market structure and landscape helps marketers develop marketing plans and enact successful marketing strategies. As part of a business plan, a definition of the market structure and competitive landscape is vital to planning effective advertising or other marketing campaign.
To define market structure from a marketing perspective, ask the following questions:
- Who is the top player in this market? When you look at the business category, what company or companies stand out? Among booksellers, the obvious choice is Amazon, Barnes & Nobles, and Borders. Examine your own industry and define the top layer of the competitive pyramid with the top player or players.
- Who are their competitors? Now who's playing among the second, third, and fourth tier? Who is online in this category, and who has only brick and mortar stores? Can you research their gross revenues, their marketing plans? That may not be as far-fetched as it sounds. Using any search engine, type in the company names and see what comes up. Publicly traded companies (companies traded on one of the stock exchanges) must publish Annual Reports. These provide potential investors with detailed information on the company from finances to marketing strategies, but they're free, public knowledge, so you can gather them online, read them, and distill your competitor's marketing strategies from them. Many companies divulge juicy bits of competitive intelligence in their press releases. Releases are often archived on their websites, providing another glimpse into their strategies.
- Who will be the local competitors? If you are competing locally with a brick and mortar store, pay particular attention to local competition.
Marketers look across the various companies in these categories of competition and examine the goods and services offered. They look at the four P's of marketing among the competitors: product, price, place and promotion. They seek to use this information to help them form their own strategies to drive customer acquisition, retention, and overall profitability.
Defining Market Structure Isn't Always Easy
Defining market structure isn't always easy. Definitions remain fluid and subject to change among various disciplines, such as economists and marketers, and even different companies may view market structure differently. For the small business owner or entrepreneur, focusing on market structure with an eye towards defining the competition, suppliers and other factors helps focus the marketing strategy to pinpoint potential strengths, weaknesses, opportunities and threats. Define market structure in the way that makes the most sense to your business opportunity or the topic at hand.