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Economic boundaries of the industry and the factors that determine them
One of the first issues to be addressed in analyzing an industry is the question of its boundaries. What is included in this industry? This is not an easy task, as many industries are dynamic and develop very quickly. So, for example, in the 60s one could talk about the electronics industry, covering the entire range of goods manufactured in those years. Today
these are several new industries - consumer electronics manufacturing, com
computers, microprocessors, etc.
The approximate structure of the national economy
The economic boundaries of the industry, the number and concentration of enterprises included in its composition, the conditions for entry into the industry, the type of product are determined by an important external factor in the functioning of the industry - the market structure.
In various market structures, each of which has its own parameters and can be represented as a specific market model, various types of industries are formed.
As you know, there are four main market models: pure
(perfect) competition, pure monopoly, monopolistic competition and oligopoly.
Pure (perfect) competition - competition arising between enterprises selling the same goods. In this case, prices for goods are determined
the ratio of supply and demand.
It is necessary to distinguish between the concept of imperfect competition - competition in conditions when individual manufacturers have the ability to control prices for the products they produce. In a developed market economy, pure or perfect competition is extremely rare and is an abstract model. Imperfect competition is represented by industries of pure monopoly, monopolistic competition and oligopoly. With imperfect competition, entry into the market and exit from the market are difficult, and access to information is limited.
Pure monopoly is a type of industry market in which:
• one company sells a unique product that does not have a close substitute;
access to other manufacturers on the market is closed;
• the monopolist company has significant control over the price of the product sold.
With a pure monopoly, price competition is absent or limited.
Monopolistic competition is a type of industry market in which there are a fairly large number of firms selling differentiated products and exercising price control over the selling price of the goods they produce. Monopolistic competition implies relatively free access to the market.
The market of monopolistic competition is the market for a number of sellers and buyers who make transactions in a wide range of prices. There is significant non-price competition in such a market.
Oligopoly is a market model in which there are several sellers, the share of each of which is so large in total sales in the market that a change in the quantity of products offered by each seller leads to a change in price.
The types of industries corresponding to these models differ in:
? the number of enterprises that are part of the industry,
? type of product;
? terms of entry into the industry;
? price control features
and other factors determining the economic boundaries of the industry and the effectiveness of its functioning. For example, in a pure monopoly, when the company is the sole supplier of a homogeneous
goods, the economic boundaries of the company expand to the scale of the industry. The output of a monopoly company is compared with the output of the industry, while the demand curve for the products of the monopolist is a market demand curve for this product.
The industry of perfect competition includes many independent enterprises producing homogeneous and standardized products.
Entrance to the industry and exit from it is absolutely free, information is available to each enterprise. The share of each company is very small,
therefore, her decision to lower or raise the price does not affect the market price. There is no price control and the company “receives” the set price by the market and “agrees with it”.
Perfect competition and pure monopoly are two extreme cases of market structure. Both are extremely rare. Intermediate and much more realistic models of market structures are oligopoly and monopolistic competition.
The existence of the industry under monopolistic competition, when each seller’s product is differentiated, enough similarities can be found between different types of products to unite sellers into broad categories similar to the industry. A product group is a few closely related but not identical products that satisfy the same need of customers. In each product group, sellers can be considered as competing firms within the industry.
When describing the economic boundaries of the industry, it is necessary to evaluate the cross elasticity of demand for the goods of competing firms.
Cross demand elasticity is a form of demand elasticity in which a change in the price of one product leads to a change in demand for another (similar in its consumer qualities) product. A positive cross-elasticity means that the goods are interchangeable. The negative value of cross elasticity means that the goods are complementary.
The concept of cross-elasticity of demand allows us to measure how sensitive consumer demand for one product (say, X) is to a change in the price of some other product (say, Y). The formula of cross elasticity of demand represents the ratio of the percentage change in the volume of consumption of the product X to the percentage change in the price of the product Y:
If the coefficient of cross elasticity of demand has a positive value, that is, the quantity of products requested X varies in direct proportion to changes in the price of product Y, then products X and Y are interchangeable goods. For example, the rise (fall) in the price of oil (Y) forces consumers to buy more (less) margarine (X). The greater the positive coefficient, the greater the degree of interchangeability of these two products. If the coefficient of cross elasticity is negative, we can conclude that the products X and Y “come complete” and are complementary products. So, the increase (decrease) in the price of cameras will lead to a reduction (increase) in the number of films purchased. The greater the value of the negative coefficient, the greater the complementarity of the goods. Zero or almost zero coefficient indicates that the two products are not interconnected, or are independent goods. For example, one can hardly expect that a change in the price of oil will have any noticeable effect on the number of purchases of film.
In an industry with monopolistic competition, the cross elasticity of demand for products of rival firms should be positive and relatively large. This means that the products of competing firms are very good substitutes for each other, and if the firm raises the price above the competitive price, then it can expect a significant sales volume loss in favor of competitors.
The characteristics of market structures and their impact on the formation of the industry are shown in table 1.
Table 1 -
forms of market structures and their influence on the formation of industries
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