English for Economists

4.2. MARKET STRUCTURE

DISCOVERING CONNECTIONS

Think of some durable consumer goods that your family possesses – perhaps a car, a television, a stereo, a camera, a personal computer, a cooker, a fridge, a hair dryer, and so on. Think of your casual clothes, especially jeans and sports shoes. Think of toys you had as a child. Think of the brands of food and drink you habitually consume, including breakfast cereals, chocolate, tea and instant coffee. Think of the products you use to wash yourself and your clothes.

In each case, do you know whether the company that makes them is one of the following?

–the market leader (with the biggest market share);

–the market challenger (the second-biggest company in the industry);

–one of many smaller market followers.

If you buy or have bought products that are not produced by the market leader or a well-known market challenger, what is the reason?

–chance;

–price;

–because the product has a unique selling proposition that appeals to you;

–because you need something special.

READING

Text 1

Before reading, take a few minutes to preview the text. Briefly answer the following questions.

1.How many parts are there in the reading?

2.Identify the headings. What do they tell you about the topic of this reading?

3.What do you already know about the topic?

Market Structures

Market structure is determined primarily by (1) the number of firms selling in the market; (2) the extent to which the products of different firms in the market are the same or different; (3) the ease with which firms can enter into or exit from the market. Based on these three criteria, economists usually group market structures into four basic categories: (1) pure competition; (2) monopoly; (3) oligopoly; and (4) monopolistic competition. Let us examine each of these market structures.

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Pure Competition

The main characteristics of the pure competition are:

1.Many sellers: There are many sellers, and each firm is so small relative to the entire market that its actions will have no effect on the price of its product. Instead, it must accept the going market price, established by the forces of supply and demand.

2.Standardized product: The products of the various firms in the market are so nearly identical that buyers do not prefer the product of any one firm over that of any other firm.

3.Easy entry and exit: There are no significant financial, legal, technological, or other barriers to prevent new firms from entering the market or to prevent existing firms from leaving the market. Firms are free to enter and leave the market at will.

4.No artificial restrictions: There are no wage and price controls, minimum wage laws, labour unions, or other artificial restrictions on the free movement of prices and wages up and down.

Pure competition has its limitations. Although it works well in an industry such as agriculture, it is not practical for all markets and all industries. Nevertheless, since competition is the controlling mechanism of a market economy, a high degree of competition is usually desirable in most markets.

Monopoly

Monopoly is the extreme opposite of pure competition and has the following characteristics: (1) the market consists of a single seller; (2) the seller sells a product for which there are no close substitutes; (3) there are barriers to entry that prevent competitors from entering the market; and (4) the seller can control the price of his or her product.

Monopoly disadvantages include the following: (1) a monopolist charges a higher price and produces less output than a perfectly competitive firm, (2) resource allocation is inefficient because the monopolist produces less than if competition existed, (3) monopoly produces higher long-run profits than if competition existed, and (4) monopoly transfers income from consumers to producers to a greater degree than under competition.

Oligopoly

Although few industries are controlled by a single firm, main industries in the United States are dominated by a few giant firms. Such a market structure is known as oligopoly, and it is the market structure under which most large corporations operate. Oligopoly has the following characteristics: (1) a few sellers; (2) substantial barriers to entry; (3) standardized or differentiated products; and (4) substantial nonprice competition.

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Nonprice competition includes advertising, packaging, product development, better quality, and better service. Under imperfect competition, firms may compete using nonprice competition, rather than price competition.

Monopolistic Competition

Monopolistic competition is a market structure that is characterized by (1) many sellers; (2) differentiated products; (3) nonprice competition; (4) relatively easy entry and exit. It has similarities to both pure competition and oligopoly.

Monopolistic competition is similar to pure competition in the sense that there are many sellers and no strong barriers to entry. Firms can enter and leave markets on a regular basis and, indeed, do so. The amount of money required to go into business is relatively small, and there are few government regulations restricting those wishing to enter a market. In addition, each seller controls such a small share of the market that each believes that his or her actions will bring no reactions from competitors.

Unlike pure competition, however, monopolistic competition is characterized by product differentiation and nonprice competition. The latter involves efforts to persuade consumers to buy a particular product for reasons other than price. In fact, product differentiation and nonprice competition are the most important characteristics that distinguish monopolistic competition from pure competition. Firms operating in markets characterized by monopolistic competition do extensive advertising in an effort to convince consumers that their products are better than those of their competitors. Often there is little or no actual difference in the products, but advertising campaigns lead at least some consumers to believe otherwise.

Most retail stores in medium-to-large-sized cities fall into the category of monopolistic competition. They advertise heavily and try to convince consumers that their products and services are superior to those of their competitors. A store may emphasize such things as convenient location, ample parking space, courteous service, and a large selection of merchandise.

Vocabulary Focus

Ex. 1. Read the international words and guess their meaning.

Criteria, monopoly, oligopoly, limitation, economy, substitute, permanent, service.

Ex. 2. Memorize the following singular and plural forms:

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Ex. 3. From two columns choose the words with similar meaning and arrange them in pairs.

Ex. 4. From two columns choose the words with opposite meaning and arrange them in pairs.

Ex. 5. Complete the table by inserting the missing forms.

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standardized

engage

stipulate

dominate

Ex. 6. Match English and Russian equivalents.

Comprehension

Ex. 1. Match the words with their definitions.

Ex. 2. Fill in the missing words from the text.

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1.Although few ….. are controlled by a single firm, main ….. in the United States are dominated by a few giant firms.

2.Such a ….. is known as oligopoly, and it is …… under which most large corporations operate.

3.……usually define oligopoly as few enough firms so that there is mutual interdependence among the firms.

4.Nonprice ……involves efforts to persuade consumers to buy a particular product for reasons other than price.

5.Monopolistic competition is similar to pure competition in the sense that there are … and no strong barriers to entry.

6.Unlike …, however, monopolistic competition is characterized by product differentiation and nonprice competition.

Ex. 3. Expand the sentences.

1.Market structure is determined primarily by… .

2.Economists usually group market structures into four basic categories: … .

3.The main characteristics of the pure competition are … .

4.Monopoly is the extreme opposite of pure competition and has the following characteristics: .… .

5.Oligopoly has the following characteristics: …. .

6.Monopolistic competition is a market structure that is characterized by … .

Ex. 4. Answer the following questions, using the text.

1.What are the four characteristics of pure competition? Does pure competition exist?

2.What problems would exist in a purely competitive economy?

3.Describe four characteristics of monopoly.

4.Identify four characteristics of oligopoly. What is meant by “mutual interdependence”? Describe nonprice competition.

5.What are the four characteristics of monopolistic competition? In what ways is monopolistic competition similar to oligopoly? In what ways is it similar to pure competition?

Text 2

Scan the text and find definitions of the following terms: cost-plus pricing, competitive pricing, value pricing. Give their Russian equivalents.

Three Pricing Strategies

There are three basic pricing strategies: cost-plus pricing, competitive pricing, and value pricing.

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In cost-plus pricing, you look at the cost of what you sell-that is, the total marginal cost–then add on the profit you need to make. That’s your price. Cost-plus means “cost plus profit.”

This method of pricing is straightforward and ensures that you will make money on what you sell. Unfortunately, it does not ensure that you will sell it. The success of this pricing strategy depends on targeting a “reasonable” profit and controlling your costs. It also depends on not being under-priced by a competitor.

A competitive pricing strategy aims to price the product at the lowest price among all recognized competitors. Low prices are one way to compete effectively, and sometimes competitive pricing is essential. For instance, in an industry selling a commodity, the outfit with the lowest price will usually succeed. That’s because when the products themselves are not differentiated, price becomes the differentiating factor.

Competitive pricing is not just for commodities. In retail, for example, portable CD players are not a commodity, but once a customer has decided she wants to buy one, price will play a big role in which type she buys. So competitive pricing is common in retailing. In fact, some retailers offer to beat any other advertised price.

In general, the success of a competitive pricing strategy depends on achieving high volume and low cost – preferably the lowest in the industry – so you can maintain the lowest price and still make a profit. Success also depends on avoiding a destructive price war.

A value pricing strategy is the alternative to basing your prices on your costs or your competitors’ prices. Instead, you base your prices on the value you deliver to customers. In this strategy, you deliver as much value as possible to your customers – and charge them for it. With this strategy, you charge a high price and justify it by delivering high value.

Value pricing is common in high technology and luxury items, such as clothing, restaurants, and automobiles.

In practice, a business considers all three pricing strategies. You have to consider you costs, or your profits will suffer. You have to consider your competitor’s prices, even if you’re not competing on price. You must consider the value you deliver because no matter what you sell, customers want value for their money.

Ex. 1. According to the text

1.A cost plus profit pricing is

a.a straightforward method;

b.a method that ensures that you will make money on what you sell;

c.a method that includes total marginal cost and profit you need to make;

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d.all of the above.

2.A competitive pricing strategy aims

a.to beat any other advertised price;

b.to price the product at the lowest price among all recognized competitors;

c.to compete effectively;

d.all of the above.

3.A value pricing stratage suggests that you should base your prices on

a.your costs and expenses;

b.your competitor’s prices;

c.the value you deliver to customers.

Ex. 2. Speak on the following issues:

1.Advantages and disadvantages of cost-plus, competitive and value pricing.

2.You own a business. What type of pricing would you prefer? Why?

Text 3

As you read the text, write a short heading for each paragraph.

Market Leaders, Challengers and Followers

In most markets there is a definite market leader: the firm with the largest market share. 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.

Market leaders usually want to increase their market share even further, or at least to protect their current market share. One way to do this is to try to find ways to increase the size of the entire market. Contrary to a common belief, wholly dominating a market, or having a monopoly, is seldom an advantage: competitors expand markets and find new uses and users for products, which enriches everyone in the field, but the market leader more than its competitors. A market can also be expanded by stimulating more usage: for example, many households no longer have only one radio or cassette player, but perhaps one in each room, one in the car, plus a Walkman or two.

In many markets, there is often also a distinct market challenger, with the second-largest market share. In the car hire business, the challenger actually advertises this fact: for many years Avis used the slogan “We're number two. We try harder.” Market challengers can either attempt to attack the leader, or to increase their market share by attacking various market followers.

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The majority of companies in any industry are merely market followers which present no threat to the leader. Many market followers concentrate on market segmentation: finding a profitable niche 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.

A market follower which does not establish its own niche is in a vulnerable position: if its product does not have a “unique selling proposition” there is no reason for anyone to buy it. In fact, in most established industries, there is only room for two or three major companies: think of soft drinks, soap and washing powders, jeans, sports shoes, and so on. Although small companies are generally flexible, and can quickly respond to market conditions, their narrow range of customers causes problematic fluctuations in turnover and profit. Furthermore, they are vulnerable in a recession when, largely for psychological reasons, distributors, retailers and customers all prefer to buy from big, wellknown suppliers.

Ex. 1. Find words in the text which mean the following.

1)a company's sales expressed as a percentage of the total market;

2)short-term tactics designed to stimulate stronger sales of a product;

3)the situation in which there is only one seller of a product;

4)companies offering similar goods or services to the same set of customers;

5)a short and easily memorized phrase used in advertising;

6)the division of a market into submarkets according to the needs or buying habits of different groups of potential customers;

7)a small and specific market segment;

8)a factor which makes you superior to competitors in a certain respect;

9)a business's total sales revenue;

10)a period during which an economy is working below its potential.

Ex. 2. Which of the following three paragraphs most accurately summarizes the text, and what is wrong with the others?

First summary:

In most markets there is a definite market leader, with the largest market share, which frequently helps other firms to introduce new products. In many cases, there is also a market challenger, which wants to replace the leader, and various market followers, which seek out particular niches that do not interest the leader. Other followers merely imitate the products of larger companies, but this is a dangerous strategy during recessions.

Second summary:

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In most markets there is a leader that strongly influences other firms in the introduction of new products, price changes, promotions, and so on. There is frequently also a market challenger, with the second-largest market share, which can attempt to increase its market share by attacking either the leader or some market followers. Market followers concentrate on profitable niche products that are in some way differentiated from the products of larger companies.

Third summary:

The first company in a particular market nearly always becomes the market leader, a position it will try to keep by regularly attacking distinct market challengers and followers. Most followers can eitherconcentrate on small market segments or niches, or follow the safer strategy of imitating the leader’s products.

WRITING

Rearrange the following sentences and part-sentences to make up a short text about market concentration in writing. Follow the following guidelines:

–Begin with a paragraph containing arguments both against and in favour of monopoly.

–Continue with a paragraph defending or justifying market concentration.

–End with a paragraph arguing that monopolies are always short-lived, and so not a problem.

A. 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.

В. 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&D, capital financing, and so on.

С. 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.

D.Although some people argue that any barrier to competition will inevitably lead to inefficiency.

E.An example here would be telecommunications.

F.and businesses facing no competition have no incentive to find ways to reduce costs.

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