Market structure and competition

Market structure and competition To start with, I’d like to define what the word “market” means. Generally speaking, a market is a gathering of people for buying and selling, the place where they meet. According to the character of concluded contracts there are two types of markets: spot markets and futures markets. In the spot market you can buy or sell goods, currency or securities that are available for immediate delivery. Futures market means the buying and selling of these things for delivery at

a future date for a price fixed in advance. We also can define several types of markets according to their function: • Commodity markets/exchanges • Stock markets/exchanges • Foreign exchange markets Commodity markets are the places where raw materials and some manufactured goods are bought and sold for immediate or future delivery. Main terminal markets are situated in London and New

York. By the word “terminal market” I mean markets dealing mainly in commodities that will be available in the future (futures) rather than goods that are available immediately (they are called actuals, by the way). Most terminal markets are outside the countries that produce the goods. Deals on some commodities like, for example, teas are concluded at the auctions where dealers are supposed to inspect every lot for sale. But in fact they deal with certified stock – which means a commodity

stock which had been checked and acknowledged proper for delivery under the futures market contracts. The actuals and futures deals are concluded by way of daily callovers where the dealers are represented by commodity brokers who buy and sell raw materials or manufactured products for a fee in a commodities market. The second type of markets according to their function is stock markets – these are markets where stocks and shares are bought and sold under fixed rules, but at prices controlled by supply and

demand. The main idea of stock exchanges is to enable public companies, the state and local authorities to attract capital by way of selling securities to investors. These markets can be called primary if they trade new issues of securities, or secondary if they trade existing securities. Frankly speaking new issues make up an insignificant part of the market turnover. The development of the secondary market provides for liquidity and reducing the risks of investments.

Foreign exchange markets are the markets where foreign currencies are traded. Market makers acting on the foreign exchange markets are either dealers (firms hired by commercial banks and acting as principals buying and selling currencies for a profit for themselves) or foreign-exchange brokers, who buy and sell for clients and act as go-betweens therefore. The is such a concept as free markets, where prices are allowed to rise and fall according to supply

and demand, without prices being fixed by governments (this situation is called ‘clean floating’). Countries with such a policy tend to remove all exchange controls – this set of restrictions imposed by a government on buying and selling foreign currencies. However, the Central Banks of various counties, acting on behalf of their governments, influence to some extent the market situations resorting to the

Exchange Rate Mechanism, which aim is to stabilise exchange rate fluctuations. Foreign exchange deals can be concluded either on spot currency markets with immediate delivery or on forward exchange contract markets. All I said above concerned the different types of markets, and now I’d like to say a few words about companies acting there. In most markets there is a definite market leader: the firm with the largest market share (that’s a

company’s sales expressed as a percentage of a total market). This is often the first company to have entered the field, or at least the first to have succeeded in it. The market leader is frequently able to lead other firms in the introduction of new products, in price changes, in the level or intensity of promotions and so on. And despite the fact of being already the leader, very often these companies want to increase their

market share even further, or at least to protect their current market share. One way of market expanding is to stimulate more usage, nowadays, for instance, for many families one TVset isn’t enough. In many markets, there is often also a distinct market challenger, with the second-largest market share. Market challengers can either attempt to attack the leader, or to increase their market share by attacking various market followers – who concentrate on market segmentation: finding

a profitable niche (a small and specific market segment) in the market that is not satisfied by other goods or services and that offers growth potential or gives the company a differential advantage because of its specific competencies. Market followers present no threat to the leader. A market follower who doesn’t establish its own niche is in a vulnerable position: if its product doesn’t have a ‘unique selling proposition’ there is no reason for anyone to buy it.

Although small companies are generally flexible and can quickly respond to market conditions, their narrow range of customers causes problematic fluctuations in turnover (a business’s total sales revenue) and profit. Furthermore they are vulnerable in a recession when, largely for psychological reasons, distributors, retailers and customers all prefer to buy from big, well-known suppliers. If we look at the ways different firms operate we’ll see that under some market forms firms have no

control over price, in others they have the power to adjust price in a way that adds to its profits. So the last theme I’d like to cover speaking on this topic is different market structures. Economists distinguish them according to 1) how many firms they include 2) whether the products of the different firms are identical or somewhat different 3) how easy it’s for new firms to enter the market. 4) There are four main market structures with perfect competition at one extreme and pure monopoly

at the other. In between are hybrid forms – called monopolistic competition and oligopoly – that share some of the characteristics of both perfect competition and monopoly. So let me explain what all of them mean. Perfect competition exists when products are homogeneous, and there are many firms too small to have any influence on the market price, and firms can easily enter and exit the industry. And the situation where even one producer can affect the price of a good by increasing

or withholding output is called imperfect competition. Monopolistic competition exists when many producers of slightly differentiated products are able to sell them at well above their marginal cost. The core of the argument for competition is that as long as competition exists in markets no one producer or group of producers can afford to abuse power by charging too much or by selling shoddy goods for fear that consumers might turn away from them to buy

from another producers. In line with that argument one of the government’s tasks is to keep competition alive and functioning. Russian economy nowadays is a long way from being perfectly competitive. There are hints of competition, but monopolistic tendency is more tangible. A monopoly as a market in a particular product in which a single producer can fix an artificial price. The opposite situation, where there is only one buyer is described as monopsony.

The situation where there are only a few sellers is called an oligopoly. This frequently arises in manufacturing industry because of economies of scale – continuously declining unit costs as production increases – and the cost barriers of entering an industry (in general, barriers to entry are economic or technical factors that make it difficult or impossible for firms to entry a market or compete with existing suppliers). One more barrier for new comers is cartel - where companies

in the same industry collaborate by coordinating prices, sharing out markets, etc. In many countries this is illegal, under anti-trust laws. One type of oligopoly is called a dominant-firm ologopoly – in which a market leader can indicate its preferred price to smaller competitors. The situation in which there are only a small number of relatively large buyers in the market is an oligopsony. Some monopolies are legal.

For example, investors are granted patents that give them monopolistic privileges for a certain length of time. There are also natural monopolies, such as water, gas, electricity and telephone where it may not be economic to have a large number of competing companies laying cables or pipes to the same consumers. Consequently, utility companies such as these are frequently granted monopolies, but with prices regulated by the government. In theory there are three types of monopolies: state monopoly, natural monopoly and

legal monopoly. In practice one more types is added – buying goods for speculative purposes. It appeared due to the fact that some companies got the total control under some goods. This activity is supposed to be illegal in many countries. There are much arguing against and in favour of market concentration. The arguments against monopoly are obvious: monopolists are always able to make excessive profits,

and businesses facing no competition have no incentive to find ways to reduce costs. The only common argument in favour of monopoly concerns patents: it’s right that investor should be granted a temporary monopoly as a reward for innovation or discovery. Although some people argue that any barrier to competition will inevitably lead to inefficiency, a counter argument is that erecting barriers – for example, by process innovation, product differentiation,

persuasive advertising, or pricing policy – in order to be successful and to make competitors less successful, is a normal part of rivalry and competition. According to this view, market concentration arises naturally from a few successful firms growing larger as a result of increased efficiency, innovation, and economies of scale in production, distribution, R’n’D, capital financing and so on. Some people even argue that monopolies are always temporary and

consequently not a problem. For example, although entrepreneurs introduce new products and techniques and open up new markets, their profits are soon competed away by rivals. Even the profits made by a natural monopoly will be temporary, because they are an incentive for entrepreneurs to discover and implement new low-cost technologies. An example here would be telecommunications. According to this position, the government only needs

to ensure that there is no monopoly over important inputs, because there will never be a monopoly of scientific or artistic genius or business ideas.