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7.1: Market Environment
Opening the book…
The last module introduced the market environment. This is a very important microeconomic concept that explains a good deal regarding why some businesses succeed and others fail. See figure 1.
Figure 1
There are three elements in the market environment:
Market structure
Conduct
Performance
This description of the market environment is called the Structure Conduct Performance (SCP) model.
Market structure is a very important concept. Having a firm understanding of the level of competition one faces in an industry is very important. If you do not know who you are competing against then you cannot take defensive/offensive action to protect/gain market.
Market structure is simply a measure of competitiveness in an industry. Every firm belongs to an industry and every industry belongs to a specific market structure (see figure 2)
Figure 2
Firms in industries with one type of market structure face a different level of competition than firms in industries with other market structures.
It is helpful to recall the thermometer metaphor. One end of the thermometer shows hot (i.e., a lot of competition) and the opposite end shows cold (i.e., no competition). See figure 3.
Figure 3
Last module we examined the market structure with the highest level of competition (perfect competition). In this module we will look at the structure with no competition: monopoly.
