Market Structure Introduction - Business Environment

In economics the behaviour and the performance of firms in an industry are thought to depend upon some basic structural characteristics. This view is exemplified by thestructure–conduct–performance model, where structure determines conduct, which in turn determines performance. The basic elements included under these headings are given in Table.The structure–conduct–performance model provides a good frame work for classifying and analysing an industry. A simple example of the process can be seen in the soap powder industry. Here the market is dominated by two large producers, Unileaver and Procter & Gamble. This apparent lack of competition gives rise to certain behavioural characteristics like the massive amount of advertising, the existence of many brand names and fairly uniform prices. This process will be considered in more detail later in the chapter, but the example serves to indicate the relation ship between the structure of the market and the behaviour and ultimately the performance of firms in an industry.
Market structure’ refers to the amount of competition that exists in a market between producers. The degree of competition can be thought of as lying along a continuum with very competitive markets at one end and markets in which no competition exists at all at the other end. This chapter looks at the two extremes (perfect competition and monopoly), and the market structures which exist between. The theory predicts the effects of market structure on behaviour and performance in those markets. However, as with the working of the market mechanism, the real world is often different from the theory and therefore this chapter will look at real markets and the relevance of the theory to the real world. The structure–conduct–performance model is open to criticism1 since it says little about what determines structure in the first place. It also tends to view the firm as passive in the face of market structure, accepting the implications for conduct and performance, rather than actively trying to change and mould market structure. Michael Porter’s ‘five forces model’ will be used to broaden out the analysis.Market structure is important not only because of the implications it has for conduct and performance but also because it has an impact upon the strategic possibilities which face the organisation, its ability to act strategically and the likely effects of such strategic behaviour .

Structure-conduct-performance model

In addition, this chapter will examine how the level of competition is measured in a market, how the level of competition varies between industries and countries, and how and why this has changed over time. As mentioned above, market structures can be thought of as lying along a continuum with perfect competition at one end and monopoly at the other (see Figure). Both of these market structures are unrealistic representations of the real world, but are useful as benchmarks in assessing the degree of competition in a market. Between these two extremes lie other market structures, which are more realistic. Two will be described, oligopoly and monopolistic competition.

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