04/10/2023 Marketing Management 1

University Computing Centre

Market Segmentation and Market Structure

DBE1

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Markets

• Markets are a group of potential buyers with needs and wants and the purchasing power to satisfy them.

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Markets

• The market can be defined as an economic entity because in most cases, a market is characterized by a dynamic system of economic forces including supply, demand, competition, and government intervention..

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Market Structure

• Market structure is the number of firms producing identical products which are homogeneous.

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Market Structure

• The types of market structures include the following:

Monopolistic competitionOligopolyMonopolyPerfect competition

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Perfect competition

• A theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.

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Basic structural characteristics

• Infinite buyers and sellers - An infinite number of consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price

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Basic structural characteristics

• Zero entry and exit barriers - A lack of entry and exit barriers makes it extremely easy to enter or exit a perfectly competitive market.

• Perfect information - All consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products

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Basic structural characteristics

• Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.

• Profit maximization - Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated.

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Basic structural characteristics

• Homogenous products - The qualities and characteristics of a market good or service do not vary between different suppliers.

• Property rights - Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer

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Monopolistic competition

• Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location).

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Monopolistic competition

• In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms

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Monopolistic competition

• Monopolistically competitive markets have the following characteristics;

There are many producers and many consumers in the market, and no business has total control over the market price.

Consumers perceive that there are non-price differences among the competitors' products

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Monopolistic competition

There are few barriers to entry and exit.

Producers have a degree of control over price

The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market

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Monopolistic competition

• There are six characteristics of monopolistic competition (MC):

Product differentiationMany firmsFree entry and exit in the long run

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Monopolistic competition

Free entry and exit in the long runIndependent decision makingMarket Power - Market power means that the

firm has control over the terms and conditions of exchange.

Buyers and Sellers do not have perfect information (Imperfect Information)

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Oligopoly

• Oligopoly - is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers.

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Oligopoly

• With few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm therefore influence and are influenced by the decisions of other firms

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Oligopoly

• Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

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Characteristics

• Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs

• Ability to set price: Oligopolies are price setters rather than price takers.

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Characteristics

• Entry and exit: Barriers to entry are high. barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.

• Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms

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Characteristics

• Product differentiation: Product may be homogeneous or differentiated (automobiles)

• Perfect knowledge: Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only unsatisfactory knowledge as to price, cost and product quality

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Characteristics

• Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions

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Characteristics

• Therefore the competing firms will be aware of a firm's market actions and will respond appropriately.

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Characteristics

• Non-Price Competition: Oligopolies tend to compete on terms other than price. advertisement, and product differentiation are all examples of non-price competition

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Quick Reference to Basic Market Structures

Market Structure

Seller Entry barriers

Seller Number

Buyer Entry barriers

Buyer Number

Perfect Competition

No Many No Many

Monopolistic competition

No Many No Many

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Quick Reference to Basic Market Structures

Market Structure

Seller Entry barriers

Seller Number

Buyer Entry barriers

Buyer Number

Oligopoly Yes Few No Many

Monopoly Yes One No Many

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Market segmentation

• With growing diversity in the tastes of modern consumers, firms are taking note of the benefit of servicing a multiplicity of new markets.

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Market segmentation

• The market segmentation and corresponding product differentiation strategy can give a firm a temporary commercial advantage. Most market segmentations are the techniques used to attract the right customer.

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Market segmentation

• Due to limited resources, a firm must make choices in servicing specific groups of consumers.

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Market Segmentation

• Market segmentation can be defined as the process of dividing a market into different homogeneous groups of consumers

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Market Segmentation

• Market segmentation pertains to the division of a set of consumers into persons with similar needs and wants. Market segmentation allows for a better allocation of a firm's finite resources.

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Objectives of segmentation

• To reduce risk in deciding where, when, how, and to whom a product, service, or brand will be marketed.

• To increase marketing efficiency by directing effort specifically toward the designated segment in a manner consistent with that segment's characteristics.

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Product differentiation

• The process of creating perceived differences between the product of one firm and that of its rivals so that some customers value it more

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Target

• A person (or group of people) that a person or organization is trying to employ or to have as a customer, audience etc.

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Market segmentation

• Market segmentation is a twofold process that includes:

Identifying and classifying people into homogeneous groupings, called segments

Determining which of these segments are viable target markets

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The Segmented Market

• The premise of segmenting the market theorizes that people and/or organizations can be most effectively approached by recognizing their differences and adjusting accordingly.

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The Segmented Market

• By emphasizing a segmentation approach, the exchange process should be enhanced, since a company can more precisely match the needs and wants of the customer.

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The Segmented Market

• While product differentiation is an effective strategy to distinguish a brand from competitors', it also differentiates one product from another.

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The Segmented Market

• The objective is to sell more product, to more people, more often. The problem is not competition; the problem is the acknowledgment that people within markets are different and that successful marketers must respond to these differences.

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Choosing a Target Market from within a Defined Segment

• While it is relatively easy to identify segments of consumers, most firms do not have the capabilities or the need to effectively market their product to all of the segments that can be identified. Rather, one or more target markets (segments) must be selected.

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Choosing a Target Market from within a Defined Segment

• A company selects its target market because it exhibits the strongest affinity to a particular product or brand. It is in essence the most likely to buy the product.

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Psychographic segmentation

The division of the market into subsets according to consumers' lifestyle, personality, values and social class