market structure

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market structure

the organizational characteristics of a MARKET/INDUSTRY. Key elements of market structure include:
  1. the number of suppliers and their relative size distribution, indicating the extent of seller concentration in the market (see MARKET CONCENTRATION, CONCENTRATION RATIO);
  2. the number of buyers and their relative size distribution, indicating the extent of buyer concentration in the market;
  3. the nature of the product, whether it is a standardized good or service, or differentiated in a variety of ways (see PRODUCT DIFFERENTIATION);
  4. the condition of entry to the market, that is, the extent and severity of BARRIERS TO ENTRY confronting potential newcomers;
  5. the degree of VERTICAL INTEGRATION, that is, the extent to which suppliers produce their own input requirements, or possess their own distribution outlets for their products.

These aspects of market structure, together with underlying cost and demand conditions, are significant in so far as they have a strategic influence on the nature and intensity of competitive behaviour in a market (see MARKET CONDUCT) and hence on MARKET PERFORMANCE. To illustrate: the greater the level of seller concentration, the more heightened is the degree of mutual interdependency such that the actions of one firm will have a discernible effect on the market position of other firms, causing them to respond with actions of their own. In this situation, for example, recognition that aggressive price competition is likely to prove mutually ruinous may well encourage suppliers to focus their competitive efforts on sales promotion and product innovation as these provide a more effective means of establishing COMPETITIVE ADVANTAGE. In turn, the greater the scope for the deployment of product differentiation strategies, the more prominent this area of competition is likely to become. Barriers to entry may arise naturally from the supply characteristics of the market (for example cost advantages to established firms arising from ECONOMIES OF SCALE), or they can be created predatorily by established firms to keep newcomers out (for example the use of EXCLUSIVE DEALING practices). In either case established firms are protected from new competition. Likewise, vertical integration by a DOMINANT FIRM may limit competition in a market by depriving rivals and potential entrants of inputs or distribution outlets. Additionally, a firm which is diversified into a number of markets (see DIVERSIFICATION) may be able to cross-subsidize its activities in a particular market in order to advance its position in that market.

In sum, market structure provides the backdrop to a firm's strategic actions as it seeks to establish competitive advantage over rivals, but, importantly, can itself be altered and controlled by firms' actions; for example, firms may seek to increase their market shares by TAKEOVERS and MERGERS, thereby raising the level of seller concentration.

COMPETITION POLICY interest in market structure centres on the association of market structure and conduct, and their impact on market performance. Mergers and takeovers, for example, which would reduce competition, may be prohibited on the grounds that they would unduly increase a firm's power to control market prices and profit levels. See MARKET STRUCTURE-CONDUCT PERFORMANCE SCHEMA, MONOPOLISTIC COMPETITION, MONOPOLY, OLIGOPOLY, PERFECT COMPETITION.

market structure

the way in which a MARKET is organized. The THEORY OF MARKETS focuses especially on those aspects of market structure that have an important influence on the behaviour of firms and buyers and on MARKET PERFORMANCE. Structural features having a major strategic importance in relation to MARKET CONDUCT and performance include:
  1. the degree of SELLER CONCENTRATION and BUYER CONCENTRATION as measured by the number of sellers and buyers (whether there are many sellers/buyers in the market, or a few, or only one) and their relative size distribution;
  2. the CONDITION OF ENTRY to the market (the extent to which established suppliers have advantages over potential new entrants because of BARRIERS TO ENTRY);
  3. the nature of the product supplied (whether it is a HOMOGENEOUS PRODUCT or subject to PRODUCT DIFFERENTIATION;
  4. the extent to which firms produce their own input requirements or own distribution outlets for their products (VERTICAL INTEGRATION);
  5. the extent to which firms operate in a number of markets rather than just one market (DIVERSIFICATION).