What is a monopoly? What is an oligopoly? Or even more confusing – what is an oligopsony? These are terms used to describe the state of competition among firms buying or selling similar or related products. Firms seek to find an advantage to distinguish themselves from the competition when offering a specific set of products. But as we saw in a previous post, economic products themselves have certain characteristics that influence their selling conditions.

It consists of many buyers and sellers with none able to influence the price of a product. Here are some examples.

Oligopoly – several large sellers that have considerable control over the price of a product
Monopoly – one seller with considerable control over the supply and price of a product
Monospony – one buyer with considerable control over the demand and price of a product
Oligopsony – several large buyers have considerable control over the purchase price of a product.

Market structure has become a key focus of strategic thinking in modern firms. It refers to the environment for selling or buying a product or product series and influences key decisions about investments in production, people, and promotion. It is impacted by technological innovations, government regulations, customer behaviors, and costs. Market structure has an impact on the conduct of the firm and can influence their economic success.

Market structure is primarily about the state of competition for a product and how many rivals a company will have to deal with when introducing it. How easy is it to enter that market? Will the product be successful based on current designs and plans for it or will the product need to be changed? How will the product be priced?

How competitive are digital and tech environments? Due to technological innovation and globalization, competitive opportunities and restrictions are under scrutiny. The Internet and its World Wide Web (WWW) have introduced exciting new dynamics that have been subject of major research studies. A surge of platforms into the digital environment with the “Web 3.0” introduced disruptive features as e-commerce expanded beyond “dot.com” B2C and B2B connections to AI and blockchain.

Market Type and Number of Sellers

The concept of market structure has not only influenced microeconomics but also provided essential tools for managers.
This post examines different states of competition among firms supplying digital goods and services. It will look at the number of firms supplying a product and the importance of differentiation between products offered. An important factor is the barriers to entry (or competitive advantages) into the market for a particular product. Barriers to entry can help a digital media firm establish and hold market presence for its product and will be discussed at length in other posts.

Monopolies

Most people are familiar with the idea of a monopoly. It refers to one company with considerable control over the supply and price of a product. For a long time AT&T had a monopoly over the telephone system in the US. They supplied a black rotary phone that could connect to nearly every phone in the country. Some electric utility companies have a monopoly like HECO in Hawaii. Usually some government involvement is needed to maintain a monopoly. The term “natural monopoly” emerged to refer to a firm that can serve the entire market demand of a product at a lower cost than a combination of two or more smaller, more specialized firms.
A topic that will be discussed in more detail below are situations when an organization has strong buying power. These firms are called monopsonies.

Many companies do not control 100 percent of the market. Google controls some 75% of the global web search market. With Bing serving some 8 % of the market and Yahoo! Around 5%. Baidu has about 7% although they are dominant in the Chinese language market where they also benefit from government protection. Facebook is dominant in social media with a considerable lead over Google+ who has basically ceded to the friend to friend (F2F) social media market to the search engine giant.

Sometimes you will hear the term “duopoly” to refer to a situation where two companies dominate a market like Coke and Pepsi for cola drinks, Airbus and Boeing for commercial aircraft , Visa and Mastercharge for credit card authorization, Apple’s iOS and Google’s Android for mobile operating systems, and Apple and Microsoft for personal computer operating systems. These companies are more accurately referred to as oligopolies.

Oligopolies

A more useful term is oligopoly. This is a condition where several large sellers that have considerable control over the price of a product. Mobile services are a good example: AT&T, T-Mobile, and Verizon provide almost all the wireless services in US markets. The bar is a little lower as this type of market structure is where a small number of firms own more than 40% of the market.

Media companies have generally structured themselves this way. BMG, EMI, Universal Music, and Warner have been traditional powerhouses, although digital technologies continue to disrupt this media industry. Disney, CBS, Time Warner, NBC Universal, Viacom and Fox News Corporation dominant the mediasphere and are considered oligopolies? Over-the-top (OTT) media industries are a bit more competitive and often considered monopolistic competition due to many new entrants, product differentiation (different types of content and user interfaces), relatively low market entry, and market power due to customer captivity and some leeway over pricing.

Monopolistic Competition

Despite its confusing name, this category has quite a bit competition. In monopolistic competition market structure, firms achieve differentiation through various means, including product features, quality, branding, customer service, and marketing strategies. This differentiation allows companies to attract specific customer segments, build brand loyalty, and exert some control over pricing, despite the presence of many competitors. This environment encourages innovation and provides consumers with a diverse range of choices.

Think restaurants. Such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. Imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes. There is an attempt to make the product unique, and thus a monopoly for that unique product. Other products are just not the same, and consequently different.

Perfect competition

Perfect competition is a theoretical ideal that provides a useful benchmark for understanding market dynamics. While no market perfectly fits all criteria, agricultural products, commodities, and certain financial markets come closest.

These markets feature numerous small producers, homogeneous products, and prices determined by overall supply and demand rather than individual firms’ actions. Understanding the characteristics of perfect competition helps in analyzing how real-world markets function and where they diverge from the ideal.
Perfect competition can emerge when a very large number of firms produce and distribute a homogeneous product. When I lived in New York City, I enjoyed going to farmer’s market at Union Square. It was a pretty good example of perfect competition.

Market structure analysis can give us insights into profitability, consumer price levels, innovation and research spending, as well as productivity levels. The key factors discussed in this type of analyis are the number of firms supplying product, the levels of differentiation between products, and the competitive advantages a company has to set up barriers to entry for other companies coming into the market.

Citation APA (7th Edition)

Pennings, A.J. (2024, May 21). Analyzing the Market Structure of a Product. apennings.com https://apennings.com/dystopian-economies/analyzing-the-market-structure-of-a-product/

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Note: Chat GPT was used for parts of this post but most came from my writings for the manuscript Digital Economies and Sustainable Strategies.

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Anthony J. Pennings, PhD is a Professor at the Department of Technology and Society, State University of New York, Korea teaching engineering and financial economics as well as ICT for sustainable development. From 2002-2012 he was on the faculty of New York University where he taught digital economics and comparative political economy. He also taught in the Digital Media MBA at St. Edwards University in Austin, Texas, where he lives when not in the Republic of Korea.

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Category: digital media economics, dystopian economies, enabling frameworks
Tags: Monopoly > Oligopsony

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