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6.2: Market Environment

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    Market structure is a very important concept. Having a good idea of the level of competition one faces in an industry is a critical piece of information. If you do not know who you are competing against then you cannot take defensive action to protect your market share against rivals.

    Think of market structure as an integral part of a larger market environment. The idea of a market environment is not new. The market environment model dates to the pioneering work of the Harvard economist Edward Mason, in the 1930s, and of his doctoral student Joseph Bain, in the 1950s. In addition, the market structure (Manson simply referred to it as structure) he also identified two more elements: conduct and performance. This description of the market environment is called the Structure Conduct Performance (SCP) model.

    The main point of the SCP model is that if any one of the three elements (structure, conduct, or performance) change then the other two will be affected. So, if there is a change in market structure then this will in turn cause a change in conduct and performance.

    A diagram of a market structureDescription automatically generated

    Figure 4

    To reinforce the point of interdependency between the three market environment components let’s consider a firm in an industry all by itself because of a patent. Think about how being the only firm in an industry would affect your conduct and performance. If the monopolist was lucky enough to earn an economic profit, then it could rest easy regarding potential competitors coming into the market. This absence of a competitive threat will affect the firm’s conduct and performance.

    Now, consider the day after the firm’s patent expires and competitors enter the industry. Do you think the firm’s executives and workers would conduct themselves differently? Do you think there will be a change in profit or market share? This change in market structure (i.e., more competition) led to changes in conduct and performance.

    Market structure is not always the spark that leads to change in the entire market environment. Firms must also consider the influence of their own conduct on an industry's structure and, ultimately, on their own performance. In other words, a change in conduct can lead to changes in both market structure and performance.

    A diagram of a market structureDescription automatically generated

    Figure 5

    A good example of conduct leading to a change in the market environment comes from the personal computer industry. Dell Inc. is a technology company that develops, manufactures, sells, and supports personal computers and other computer-related products. Dell’s unique was its focus on cost control and direct sales model. Unlike other computer sellers, Dell had no stores. Prior to 1996, customers ordered their PCs from a catalog. And with the arrival of the World Wide Web, people ordered on-line. In addition to the cost savings from not having to maintain expensive stores, Dell made most of its products only after a customer placed an order. With low overhead costs and just-in-time inventory Dell was able to undercut rivals on price and capture a large market share.

    Unable to replicate Dell’s success and faced with declining revenues (due to the fall in PC prices), some rivals left the industry (IBM sold its PC division to China-based Lenovo Group) and some joined forces (HP merged with rival Compaq).

    So, Dell conducted itself in a unique and successful way and this led to price wars, razor time profit margins (i.e., a change in performance) and mergers (i.e., a change in market structure).

    Bottom line: To succeed in business a critical first step is to be aware of the kind of market environment in which you will compete.

    This page titled 6.2: Market Environment is shared under a not declared license and was authored, remixed, and/or curated by Martin Medeiros.

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