Market Structure And Dynamics

Just as living organisms have a reasonably standard pattern of growth and development, so do markets have, especially competitive markets (oligopoly and beyond).

A market as we know it is a place where buying and selling take place. But there are different market structures and dynamics. The nature of goods/services sold and the number of sellers greatly affect the market structure of any industry. Generally, when it comes to competition, there are four basic types of market structures: perfect competition, imperfect competition, oligopoly, and monopoly.

1. Perfect competition describes a market structure, where a large number of small firms compete against each other. In this scenario, a single firm does not have any significant market power. As a result, the industry as a whole produces the socially optimal level of output, because none of the firms can influence market prices. An example would be the sachet water industry in Nigeria ( rarely can Nigerians say they have only one preference in the brand). In this type of structure, differentiation by the brand is low, more factors like distribution and accessibility is a more potent weapon for competition and customers don’t mind any option. We can also see a very good example among brokers in the stock market.

1. Imperfect competition otherwise called monopolistic completion is a type of market structure, where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar, but slightly differentiated products. That gives them a certain degree of market power which allows them to charge higher prices within a certain range, at this stage brand strategy on differentiation is a huge advantage. An example of this may be competition among management consultants, churches, banks, etc.
2. An oligopoly describes a market structure that is dominated by only a small number of firms. That results in a state of limited competition. The firms can either compete against each other or collaborate. Most times they form cartels in that industry to fight new entrants and also to set prices and other factors favourable to them. By doing so, they can use their collective market power to drive up prices and earn more profit. We see this among the main telecoms firms in Nigeria, shipping companies in maritime, the Nigerian cement industry.  And as a rule of thumb, we say that an oligopoly typically consists of about 3-5 dominant firms. To give another example of an oligopoly, let’s look at the market for international gaming consoles. This market is dominated by three powerful companies: Microsoft, Sony, and Nintendo. That leaves all of them with a significant amount of market power.
3. The last type of possible market structure is a monopoly. In monopoly, it refers to a market structure where a single firm controls the entire market. In this scenario, the firm has the highest level of market power as consumers do not have any alternatives. We see this with PHCN today, and so it was with Nitel before. Monopolistic markets are known for mediocrity as there is no competition. And competition drives innovation that eventually favours everyone. This is usually missing in monopoly.

Our main focus here will be on imperfect markets, otherwise called imperfectly competitive markets and even perhaps an oligopolistic market. This is because most industries are made up of that type of market. In line with this, there is economic research inspired by the BCG (Boston Consulting Group) of the 1960s). It showed a pattern that grouped firms in a market structure into quadrants. In other words,  it invented the Market Growth/Market Share quadrants ( it’s a major part of the marketing Specialization of most MBAs).

BCG once researched approximately 200 industries in mainly imperfectly competitive and oligopolistic markets and the result revealed that markets evolve in a highly predictable fashion in terms of market share and competition. It is governed by the Rule of Three.

The 123 Rule basically breaks down the market into 3 main competitor types.

There are always three major competitors in any free market within any one industry. Knowing your position in the market ( alongside your product life cycle and the BCG Market Share (x-axis) – Market Growth (y-axis) quadrant should determine your strategy.

By market share, we can divide the categories of companies into the following:

• Number 1 firm: it fights for total market domination (Use Defensive Marketing)
• Number 2 firm: it fights for increased market share (Use Offensive Marketing)
• Number 3 firm (rest of them): it fights for profitable survival (Use Flank and Guerrilla  Marketing

Just like GTBank (let’s call it the number 1 firm) in market positioning is twice the size of the 2nd place (most likely Firstbank/Zenith), General Motors in America has almost twice the size of Chrysler and MTN has almost twice the size as Glo ( the industry 2nd), in most industries, there are trends. The number one which refers to the market leader (they are like the title defenders), an example will be GTBank and MTN;  the number 2 brand (the challengers, maybe First bank and Globacom) and the thirds (usually a large number of firms can be in this category at the same time, let’s call it “the rest of them”).

 The thirds can be referred to as “the rest of them”. They are ever just trying to just make a profit without a lot of immediate aspiration to go head to head or attempt to beat the numbers 1 and 2 (Unity Bank and Smile 4G). Usually, even if the entire market was given to them, they’d fail for lack of production and management capacity. Most of us are probably here.

The number 1 usually has twice the market share of the number 2’s and three times that of the rest in the third category.  The number 1 company is usually the least innovative, though it may ironically have the largest R&D budget.

The number one is usually big enjoying macroeconomic incentives and economy of scale but it is usually very slow to change. And number 3 usually produces the most innovations which is most times stolen by the number 1 . While number 1 and number 2 battle it out through head to head collisions with the two playing defensive and offensive market strategy respectively; the Number 3 guys are advised to concentrate on a niche market. Guerrilla Marketing is recommended for the number 3.

Business is like a game of football. It is uninteresting and almost meaningless without an opposing team. Also just like football, if the team simply identifies the goal line and moves the ball towards it without regard to the competing team, they most likely will be blocked in their effort. To win the game, the team must focus its efforts on outwitting, outflanking, or over-powering the other side.

The right strategy for the right type of competitor is based on market share positioning.

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