research about market structure

Market structure analysis: What it is and how to do it

This article examines market structure analysis, including a comparison of marketing and economic methods and discussions of defining a market, getting to an overall market structure, marketplaces versus study of important groups, market structures, and market structures versus market segments.

Editor’s note: Steven Struhl is senior vice president, senior methodologist at Total Research, Chicago.

What is market structure analysis? We start with perhaps the most obvious opening question of any article that you will read this year or next. We also begin our answer with an enthusiastic statement: “Unfortunately, no clear definition exists.” Now, let’s see what we can do about this.

Many of us have remained blissfully ignorant of this, but there is nonetheless a large literature on market structure analysis. (A sampling of just some of the articles is cited at the end.) Careful review of these leads to two basic conclusions:

• Numerous approaches to market structure analysis have been proposed in a very large number of scholarly works, with no approach seeming predominant.
• Plowing through all these articles requires frequent naps.

Some of the confusion surrounding this topic arises from the fact that two contrasting traditions have embraced it - namely, marketing and economics. As you might expect, the basic approaches are different. (Perhaps more surprisingly, some of the marketing papers are even harder to read than the ones from some economists. So we can see that, over the years, marketing at least has gained in the area of obscurity.)

Comparing and contrasting: marketing vs. economic methods

We will briefly review both methods, point out some very large differences and commonalities, and then discuss the marketing approach.

Marketing approaches mostly include these basic elements:

• some means to analyze the structure of relationships among competing companies;
• some other means to analyze the structure of relationships among competing brands.

Typically these studies include several areas of focus, whether primarily geared toward looking at competitive entities or brands. They often will investigate how brands are used, and the relationships of usage patterns among brands. They often look at the relationships in ways that brands are perceived. It is fairly common for studies of market structures to include just these topics.

Price elasticities and cross-price elasticities are other important market structures, however, even though they are not often mentioned in this way. There are other, more specialized views of what belongs in a market structure analysis. Trying to summarize them can get complicated. We will pass on tackling many of the more specialized definitions, then, and hope that you can tolerate the disappointment this causes.

Market segments usually are not considered market structures. This is one of the less intuitively appealing aspects of most definitions. Segments and structures can have some fairly complicated relationships, and we indeed will this discuss later.

Now let’s take a very brief view of economic approaches. The list of topics that these cover is broad and, as mentioned, somewhat different from those covered by the marketing approaches. Aspects of markets that seem to have received the most attention from the economists include:

• numbers of buyers and sellers;
• extent to which products are substitutable;
• analysis of comparative costs;
• ease of entry and exit for competitors;
• extent of mutual interdependence or (as they seem to mean) the extent to which buyers and sellers must depend on each other.

The concepts here may appear somewhat rudimentary, and lacking in appreciation of consumer psychology. One important point that the economists have in common with marketers is that they include demand elasticities and cross-demand elasticities (or words meaning the same thing) in market structures. How economists get to their answers may be very different from marketing practices, though.

Indeed, economists can do much of their work without ever talking to an actual person. Some even act as if asking people what they do or think is superfluous to understanding what is happening in a marketplace. This may seem slightly ridiculous, but we should remember that these fellows win Nobel prizes while humble marketers and market researchers do not. Perhaps they are onto something.

The secret of their success may lie in the mathematics they use. This can range from the highly sophisticated to the truly hair-raising. Indeed, as long as people are ancillary to the equations, the concepts can get highly elaborate. You are invited to draw your own conclusions about that.

Back to the marketing approach: a path for getting to market structures

Let’s start with something that may seem self-evident, but which we still need to think about carefully. The basic consideration for all marketing analyses is reaching a definition of exactly what constitutes the market. (We did warn you that this sounds foolish. Still, just reaching a definition can be quite difficult.)

The hardest part of setting this definition is that you need to set some limits on the “competitive set” of products.

Looking at just one example, let’s consider the market for diabetes care products. Most authorities say that there are two basic types of diabetics: Type I (sometimes called “juvenile,”) and Type II (sometimes called “adult onset.”) Type I diabetics always need insulin injections to live - their bodies typically produce none that they can use. Type II diabetics usually produce some insulin, and so often only require medications that help them use their insulin more effectively. (Also, exercise and healthier eating habits help too, as does keeping one’s weight down to a reasonable level.) However, some Type II diabetics require insulin, and now many Type I diabetics are taking medications that help them use insulin better along with their insulin. This has led some authorities to say that what we really need to look at is whether a diabetic is taking insulin or not - never mind the traditional medical division of diabetes into two types. Also, there are some new medications coming out that are aimed at treating “pre-diabetic” conditions - or to prevent the disease from taking hold.

Looking at all this, how do you define the structure of the marketplace? Which products are competing with each other, and how? Do you include the new pre-diabetic products in your analysis? How do you divide the universe of diabetic people? Where does exercise and diet figure in all this? Do they compete with products in the marketplace? If so, how?

Some method for setting limits on the market must be chosen, then. Traditionally, this was done by focusing at one these factors:

• the degree to which products can substitute for each other, based on consumer perceptions;
• the extent to which products are intended to serve similar purposes;
• the actual impact of products on each other, as measured by elasticity of demand and effects of products on each other, or cross-elasticity.

Note that the impact products have on each other and degree to which they can be substituted are highly similar ideas. The key point underlying this distinction, it seems, is that impact can be measured without considering perceptions at all. Therefore, different types of studies could be the focus of each of these options.

For instance, elasticity of demand, and related ideas, bring to mind choice-based modeling, or perhaps conjoint. (Whichever one, the same constraints hold, so we will discuss choice-based studies here.) In choice-based studies, we typically look at what people select in some set of competitive marketplaces. The focus here is on what people do, and not on their explanations of why they do it. If perceptions are addressed at all in a choice-based study, they are not part of the choosing that study participants do. What we learn comes from measuring study participants’ choices among the differing product configurations that they see in the interview and applying this to many alternative product configurations not tested.

Similarly, studies that focus on perceptions and opinions rarely have a choice-based exercise in them. Some of the reasons for separating these types of studies are very practical. For instance, most study participants are nearly worn out after they finish a typical choice-based exercise. Since most of us want to know everything about everything when we do a study (of course), the lucky respondent may get to make choices in up to 21 market scenarios in a choice study. (The general rule here is that the more factors we want to analyze in a choice study, the more marketplaces we need to show to get the required information.) In any event, choice-based studies usually run to the known limits of a human being’s ability to do a good job in the interview.

Most of us are likely are more familiar with studies of attitudes and opinions. Therefore, we know that by the time everybody involved has added his or her pet question(s), these get to be real monsters also. Asking a person to do one of these and - at the same time - one of those (a choice-based model or full-blown conjoint task) is just too much. We need to decide which we want - or if we want both, whether we can afford to interview two sets of people.

One key unresolved issue in defining markets

One key issue remains largely unresolved if we start our definitions of markets by looking at substitutability or market impact. That is, neither does particularly well in studying some types of competitive behavior. The same holds if we look just at consumers’ perceptions. Of course, a set of remedies has been proposed for a largely self-imposed problem. These sometimes go under the heading of hybrid forms of structure analysis.

Hybrid methods combine behavior-based and judgment-based methods of defining markets, as well as other approaches in later stages of the analysis. (As you may have expected, we will discuss this.) In more practical terms, you might need to do all sorts of studies, such as perceptions and usage studies, and choice models, and somehow put all the information together. You might even include other topics, depending on what you need to know. Different ways of putting these approaches together almost certainly will yield different ideas about market structures. Hybrid approaches underscore the notion that the search for a “true” market structure is one of those great and endless quests. No one answer about what is “true” exists here, just as is the case in the rest of life.

Getting to an overall market structure

In marketing approaches, we almost always start with people - or as we like to call them, consumers. To reach an overall market structure, individual consumer market structures need to be aggregated. Individual structures are simply each consumer’s behaviors and/or perceptions about key marketing variable(s). If you have kept your eyes open most of the time so far, you will not be surprised to learn that two main aggregation methods are used:

• behavioral aggregation (linked to studying market impact);
• subjective aggregation (linked to the extent to which products can substitute for each other, ratings, opinions, and perceptions).

Aggregation is problematic. One main question that gets asked — in some quarters, at least — has to do with what happens when we “roll up” a lot of idiosyncratic opinions. That is, how do we meaningfully aggregate individual consumer choices or opinions when these often reflect great diversity?

An aggregate market structure that we choose may NOT represent any individual’s structures well. In fact, any overall market structure gives only an average view of consumer diversity. We have numerous pundits to remind us that these averages can hide information, and may even be misleading.

In fact, this is one of the charges leveled against choice-based modeling as it has been traditionally done, at the aggregate (or group) level. Unless you really torture the data from a choice-based model, you never learn anything about what individuals are doing. (The torture method of choice today is something called Hierarchical Bayesian analysis, and generally requires squeezing the numbers for days — or “just hours” for a simpler problem, as some put it — even with the latest monster Pentium IV. But Hierarchical Bayesian analysis is another story.) The point of this is that some experts will go to great lengths to alleviate their discomfort in looking at aggregate (or group) level data.

However, these complaints about looking at groups may not be that well-founded. These are some reasons. (Just remember that you read this here first.) We almost never look at a market solely in its entirety — that is, without having some groups in mind. For instance, if our goal is to study the market for (say) diet colas, we almost certainly will not interview everybody who walks into a supermarket. This might be fun, and if not, certainly very expensive, but nobody outside the further reaches of academia is likely to find this useful.

The secret about whole marketplaces vs. study of important groups

Rather, a useful study would focus on groups of users, such as heavy vs. moderate vs. light users - or on brand-loyal users vs. frequent switchers. Then we would observe any market structures within each group. If we have defined the groups properly, the question of diversity becomes less important. That is, heavy users are typically defined along these lines: “the 20 percent of users who consume 80 percent of our wonderful product.” If heavy users are diverse, it may be nice to know this, but knowing may not help encourage them to use more of our great stuff, or even how to keep them from using less. In this case, the diversity of the group just is part of the way the world runs.

Some of you may then say something like this: “But what if some heavy users are more likely to become moderate users than others?” Or, as it more usually gets asked, “What if some heavy users are more vulnerable than others?” (This shifting of vulnerability from the product, which will suffer no recognizable losses if people decide they don’t need it, to the people themselves, is one of those wonders of modern marketing.)

One appropriate answer to a question like this is to structure the study so that it can isolate those more and less vulnerable among heavy users. That is, the study would find market structures among two or more types of heavy users, and not assume that they are all the same. Here we encounter some of the real complexity that can be found in market structure analysis. To do this accurately, we need to have some good ideas about the groups we are likely to find in the market. If groups are truly different, they will have different market structures. Just lumping these together will lead to gross inaccuracies.

In just a short note, practical marketing approaches move furthest away from (and perhaps beyond) economic approaches, by including the idea that you need to think about groups in the marketplace and to prepare to analyze them separately. In one way, then, the practitioners in marketing and market research routinely take a more sophisticated approach to market structures than their learned brethren.

Below is a flow chart summarizing this step in the process.

Developing a working picture of the market structure

Once individual consumer behavior is aggregated, the next step is devising some working representation of the overall (aggregate) structures. The goal here is showing how products compete, in ways that convey the research and managerial implications effectively. Following the discussion from earlier sections, market structures may never get aggregated up to the whole market level. The analysis may look (for instance) at heavy users, moderate users and light users separately, and go into some depth about each. It may compare and contrast groups that are important to understand. Finally, it may include some communalities, especially areas where strengths and weaknesses appear across the groups studied. It almost never would try to extract some global view and leave it at that.

Methods for depicting market structures

We can divide approaches for representing market structures into two main classes, namely, the spatial and the non-spatial. Spatial techniques are used often with data based on judgments (opinions, perceptions, ratings). These work well with various maps, or as they are known in formal circles, “continuous dimensional market structures.”

The simplest spatial techniques give a picture of market boundaries as separate clusters of products in two-dimensional space. Some judgment then is made about distance between clusters as determining where a market stops and starts.

Other maps are quite familiar to many of us - for instance, the type showing how products relate to ratings. This type of map often is called a perceptual map - as are many other types of maps. Not all maps that show attributes arrayed in space show market structures, though, as the figures below show us.

The top chart shows one type of market. This map represents brands and perceptions about them. The really basic idea behind the map is: “What appears together goes together.” Attributes that fall close to a brand are strongly associated with that brand. Attributes that fall together have similarities with each other. Brand that fall closest to each other have similar patterns in ratings.

The map on the bottom shows groups in the marketplace, and possibly even market segments (if we can find them and reach them selectively in some way). Showing what is important to various groups of buyers (or even segments) typically does not count as market structure analysis — at least when we are being pure and right about things.

Sometimes, mapping - at least various maps like the one on the top - is most of what gets called market structure analysis. So if somebody who can make life difficult (e.g., a client, a boss, or a boss’s boss) asks for a market structure analysis, you do not need to panic immediately. They may just want some maps. Of course, they might even want something entirely different that is not market structure analysis at all according to the generally accepted rules. (Then you can panic.)

Non-spatial approaches can work well to show behavioral data, as may be readily apparent. For example, analyses of product or price cross-elasticities often lead to displays that are not at all like maps, such as the simulator programs that you can create based on a choice-based modeling study. Simulators can look very impressive if you have a good programmer working on them - and can do great things with “what-if” types of questions about changing product configurations. However, they have nothing faintly map-like about them.

More on showing structures: mixed and other methods

Data based on behaviors and data based on judgments data are not, of course, mutually exclusive. They often provide important insights when combined. For instance, brand-switching studies typically involve both behavioral and opinion-based data. Brand switching, by the way, can be considered as falling under either “product substitution” or under “market impact.” (As you may recall, those were mentioned as two of the possible bases for organizing market structures a few sections ago.)

More academically-oriented practitioners have investigated various “latent” structures presumed to exist in markets. Sometimes these are latent classes, which in some ways resemble market segments. Sometimes, these are causal models or path diagrams. Because there can be diagrams involved, some call these forms of mapping. Others do not. How to categorize these method remains problematic.

A flow chart summarizing this step is shown above.

A few factors sometimes overlooked

In addition to price elasticities, many other factors aside from judgments can enter into market structure analysis. These sometimes are overlooked, and include:

• purchasing time or purchasing cycles;
• intermediaries between sellers and buyers (not just outlets, but such specialized groups as formulary committees for pharmaceuticals, regulators, insurance companies, and so on);
• geographic distribution;
• so-called exogenous or environmental variables such as the state of the economy; publicity and public opinion; governmental activity outside regulation, etc.

Also, models can be explicitly dynamic (attempting to predict change over time) or static (a snapshot of a given situation). Different methods are more suited to each basic approach. Dynamic approaches that take just a step or two into the future include market simulator programs. Other dynamic approaches that try to peer further into the future include product diffusion models, and an incredible array of forecasting techniques, probably even including the crystal ball.

More about market structures versus market segments

Most authorities do not consider market structures to be the same as market segments. In fact, doing a thorough job with market segmentation generally requires so much time and effort that you cannot get the full story on market structures in the same interview.

Here’s the mantra on segmentation, in case you are wondering why this tends to fill most of an interview. Finding segments almost always is taken to mean looking for groups that fit these three criteria:

• each has defined product-related needs different from those of all other groups;
• each can be characterized or identified;
• each can be reached selectively (or “targeted”) with communications and marketing efforts. (Or at the very least, the segments you care about have to be groups you can reach selectively.)

Here we are putting aside the idea of “a priori segments,” which are defined before looking at any data. Sometimes groups defined in this way in fact turn out to be segments, and many times not.

For instance, many banks used to segment customers based on the area of the bank that handled their business. There could be various lobby areas for the more indigent, some executive and professional areas, and finally the “upstairs,” where all the big-money people got to visit. One major bank had seven such “customer centers,” and they solemnly believed that each served a segment of the market. They believed this, that is, until they did a fairly thorough analysis of their customers’ needs. When they did, they found only three distinct groups. Their segments were convenient and supported a long tradition, but they were wasting a lot of time developing separate sets of services for all of them.

In any event, if you do find segments, market structures may exist within market segments, just as they can within any group. Different segments of a market may structure a market differently - and indeed we would expect them to do precisely this, since their needs are different.

Many other structural concerns can differ for various segments, as well. For instance, different structural constraints may apply to some market segments, and not others. We need only think of such examples as different groups having differences in insurance coverage, or different groups having access to different public services (like transportation) to see that these environmentally-imposed limitations may be crucial factors in understanding how segments work.

For these reasons, market segmentation and market structure analysis can appear in the same study. As we said earlier, though, given the capacity of most human beings to endure interviews without certain illegal recreational substances, it is hard to do justice to both issues at the same time. Almost invariably, all-in-one studies will skimp in some way on segments or on structures. Just to be fair, we should add that a few academics now claim that both segmentation and marketing structure analysis can be done at the same time, and everything comes out fine. This may happen sometimes, but how often it works remains to be proven.

Finally, as many of you have observed, some practitioners confuse segments and structures so much that the line between them is nearly obliterated. You can have a conversation with some of these people and, at the end, not only will you not know what they are talking about, but you will feel confused about both subjects. We only hope that we have left you in somewhat better condition by the time you have reached this point of the article.

Review: basic steps in getting to market structures

It all seems simple when summed up in a nice diagram like the one above, but the problem of market structures is both large and complex. As the reference list at the end of this article suggests, you may get an entirely different answer about what market structure analysis absolutely needs to include, depending on the experts you consult.

Writing this article, your author tried as much as possible to keep to a central path, and not follow anybody’s pet theories to the exclusion of others. This also represented an earnest effort not to make your feet fall asleep from the sheer excitement of reading about the topic. Tastes vary, though, and if that is just what you wanted, taking a careful look at the reference list below may provide just what you expected.

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Chintagunta, Pradeep K. (1994). “Heterogeneous Logit Model Implications for Brand Positioning,” Journal of Marketing Research, 32 (2): 304-311.

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Elrod, Terry. (1991). “Internal Analysis of Market Structure: Recent Developments and Future Prospects,” Marketing Letters, 2: 253-266.

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Fotheringham, S.A. (1988). “Consumer Store Choice and Choice Set Definition,” Marketing Science, 7: 299 -310.

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Kahn, Barbara E. and David C. Schmittlein. (1992). “The Relationship Between Purchases Made on Promotion and Shopping Trip Behavior,” Journal of Retailing, 68 (Fall): 294-315.

Kamakura, Wagner and G.J. Russell. (1989). “A Probabilistic Choice Model for Market Segmentation and Elasticity Structure,” Journal of Marketing Research, 26: 379-390.

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Kumar, V. and Robert P. Leone. (1988). “Measuring the Effects of Retail Store Promotions on Brand and Store Substitution,” Journal of Marketing Research, 25 (May): 178-85.

Popkowski, Leszczyc and Frank M. Bass (1998). “Determining the Effects of Observed and Unobserved Heterogeneity on Consumer Brand Choice,” Applied Stochastic Models and Data Analysis, 14: 95-115.

Popkowski, Leszczyc and Harry J.P. Timmermans. (1997). “Store Switching Behavior,” Marketing Letters, 8 (2): 193-204.

Sinha, Ashish. (2000). “Understanding Supermarket Competition Using Choice Maps,” Marketing Letters, 11 (1): 21-35.

Uncles, Mark D. and Andrew S.C. Ehrenberg. (1988). “Patterns of Store Choice: New Evidence from the USA.” Pp. 272-299 in Neil Wrigley (Eds.), Store Choice, Store Location and Market Analysis. London: Routledge.

Uncles, Mark D. and Kathy A. Hammond. (1995). “Grocery Store Patronage,” International Review of Retail, Distribution and Consumer Research, 5 (3), 287-302.

Vilcassim, Naufel J. and Dipak C. Jain. (1991). “A Semi-Markov Model of Purchase Timing and Brand Switching Incorporating Explanatory Variables and Unobserved Heterogeneity,” Journal of Marketing Research, 28 (February): 29-41.

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Wind, Yoram J. (1977). “The Perception of a Firm’s Competitive Position.” In Behavioral Models for Market Analysis. Eds. Franco M. Nicosia and Yoram Wind. Hinsdale, IL: Dryden Press.

Yadav, Manjit S. (1995). “Bundle Evaluation in Different Market Segments: The Effects of Discount Framing and Buyers’ Performance Heterogeneity.” Journal of the Academy of Marketing Science 23 (3): 206-215.

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What Is Market Research?

• How It Works
• Primary vs. Secondary
• How to Conduct Research

The Bottom Line

• Marketing Essentials

How to Do Market Research, Types, and Example

Joules Garcia / Investopedia

Market research examines consumer behavior and trends in the economy to help a business develop and fine-tune its business idea and strategy. It helps a business understand its target market by gathering and analyzing data.

Market research is the process of evaluating the viability of a new service or product through research conducted directly with potential customers. It allows a company to define its target market and get opinions and other feedback from consumers about their interest in a product or service.

Research may be conducted in-house or by a third party that specializes in market research. It can be done through surveys and focus groups, among other ways. Test subjects are usually compensated with product samples or a small stipend for their time.

Key Takeaways

• Companies conduct market research before introducing new products to determine their appeal to potential customers.
• Tools include focus groups, telephone interviews, and questionnaires.
• The results of market research inform the final design of the product and determine how it will be positioned in the marketplace.
• Market research usually combines primary information, gathered directly from consumers, and secondary information, which is data available from external sources.

Market Research

How market research works.

Market research is used to determine the viability of a new product or service. The results may be used to revise the product design and fine-tune the strategy for introducing it to the public. This can include information gathered for the purpose of determining market segmentation . It also informs product differentiation , which is used to tailor advertising.

A business engages in various tasks to complete the market research process. It gathers information based on the market sector being targeted by the product. This information is then analyzed and relevant data points are interpreted to draw conclusions about how the product may be optimally designed and marketed to the market segment for which it is intended.

It is a critical component in the research and development (R&D) phase of a new product or service introduction. Market research can be conducted in many different ways, including surveys, product testing, interviews, and focus groups.

Market research is a critical tool that companies use to understand what consumers want, develop products that those consumers will use, and maintain a competitive advantage over other companies in their industry.

Primary Market Research vs. Secondary Market Research

Market research usually consists of a combination of:

• Primary research, gathered by the company or by an outside company that it hires
• Secondary research, which draws on external sources of data

Primary Market Research

Primary research generally falls into two categories: exploratory and specific research.

• Exploratory research is less structured and functions via open-ended questions. The questions may be posed in a focus group setting, telephone interviews, or questionnaires. It results in questions or issues that the company needs to address about a product that it has under development.
• Specific research delves more deeply into the problems or issues identified in exploratory research.

Secondary Market Research

All market research is informed by the findings of other researchers about the needs and wants of consumers. Today, much of this research can be found online.

Secondary research can include population information from government census data , trade association research reports , polling results, and research from other businesses operating in the same market sector.

History of Market Research

Formal market research began in Germany during the 1920s. In the United States, it soon took off with the advent of the Golden Age of Radio.

Companies that created advertisements for this new entertainment medium began to look at the demographics of the audiences who listened to each of the radio plays, music programs, and comedy skits that were presented.

They had once tried to reach the widest possible audience by placing their messages on billboards or in the most popular magazines. With radio programming, they had the chance to target rural or urban consumers, teenagers or families, and judge the results by the sales numbers that followed.

Types of Market Research

Face-to-face interviews.

From their earliest days, market research companies would interview people on the street about the newspapers and magazines that they read regularly and ask whether they recalled any of the ads or brands that were published in them. Data collected from these interviews were compared to the circulation of the publication to determine the effectiveness of those ads.

Market research and surveys were adapted from these early techniques.

To get a strong understanding of your market, it’s essential to understand demand, market size, economic indicators, location, market saturation, and pricing.

Focus Groups

A focus group is a small number of representative consumers chosen to try a product or watch an advertisement.

Afterward, the group is asked for feedback on their perceptions of the product, the company’s brand, or competing products. The company then takes that information and makes decisions about what to do with the product or service, whether that's releasing it, making changes, or abandoning it altogether.

Phone Research

The man-on-the-street interview technique soon gave way to the telephone interview. A telephone interviewer could collect information in a more efficient and cost-effective fashion.

Telephone research was a preferred tactic of market researchers for many years. It has become much more difficult in recent years as landline phone service dwindles and is replaced by less accessible mobile phones.

Survey Research

As an alternative to focus groups, surveys represent a cost-effective way to determine consumer attitudes without having to interview anyone in person. Consumers are sent surveys in the mail, usually with a coupon or voucher to incentivize participation. These surveys help determine how consumers feel about the product, brand, and price point.

Online Market Research

With people spending more time online, market research activities have shifted online as well. Data collection still uses a survey-style form. But instead of companies actively seeking participants by finding them on the street or cold calling them on the phone, people can choose to sign up, take surveys, and offer opinions when they have time.

This makes the process far less intrusive and less rushed, since people can participate on their own time and of their own volition.

How to Conduct Market Research

The first step to effective market research is to determine the goals of the study. Each study should seek to answer a clear, well-defined problem. For example, a company might seek to identify consumer preferences, brand recognition, or the comparative effectiveness of different types of ad campaigns.

After that, the next step is to determine who will be included in the research. Market research is an expensive process, and a company cannot waste resources collecting unnecessary data. The firm should decide in advance which types of consumers will be included in the research, and how the data will be collected. They should also account for the probability of statistical errors or sampling bias .

The next step is to collect the data and analyze the results. If the two previous steps have been completed accurately, this should be straightforward. The researchers will collect the results of their study, keeping track of the ages, gender, and other relevant data of each respondent. This is then analyzed in a marketing report that explains the results of their research.

The last step is for company executives to use their market research to make business decisions. Depending on the results of their research, they may choose to target a different group of consumers, or they may change their price point or some product features.

The results of these changes may eventually be measured in further market research, and the process will begin all over again.

Benefits of Market Research

Market research is essential for developing brand loyalty and customer satisfaction. Since it is unlikely for a product to appeal equally to every consumer, a strong market research program can help identify the key demographics and market segments that are most likely to use a given product.

Market research is also important for developing a company’s advertising efforts. For example, if a company’s market research determines that its consumers are more likely to use Facebook than X (formerly Twitter), it can then target its advertisements to one platform instead of another. Or, if they determine that their target market is value-sensitive rather than price-sensitive, they can work on improving the product rather than reducing their prices.

Market research only works when subjects are honest and open to participating.

Example of Market Research

Many companies use market research to test new products or get information from consumers about what kinds of products or services they need and don’t currently have.

For example, a company that’s considering starting a business might conduct market research to test the viability of its product or service. If the market research confirms consumer interest, the business can proceed confidently with its business plan . If not, the company can use the results of the market research to make adjustments to the product to bring it in line with customer desires.

What Are the Main Types of Market Research?

The main types of market research are primary research and secondary research. Primary research includes focus groups, polls, and surveys. Secondary research includes academic articles, infographics, and white papers.

Qualitative research gives insights into how customers feel and think. Quantitative research uses data and statistics such as website views, social media engagement, and subscriber numbers.

What Is Online Market Research?

Online market research uses the same strategies and techniques as traditional primary and secondary market research, but it is conducted on the Internet. Potential customers may be asked to participate in a survey or give feedback on a product. The responses may help the researchers create a profile of the likely customer for a new product.

What Are Paid Market Research Surveys?

Paid market research involves rewarding individuals who agree to participate in a study. They may be offered a small payment for their time or a discount coupon in return for filling out a questionnaire or participating in a focus group.

What Is a Market Study?

A market study is an analysis of consumer demand for a product or service. It looks at all of the factors that influence demand for a product or service. These include the product’s price, location, competition, and substitutes as well as general economic factors that could influence the new product’s adoption, for better or worse.

Market research is a key component of a company’s research and development (R&D) stage. It helps companies understand in advance the viability of a new product that they have in development and to see how it might perform in the real world.

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The Determinants of Market Structure: Design for Research

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Research in the field of industrial organization has made great progress during the past twenty years with the statistical testing of hypotheses about the effects of the structures of markets on their social performance. Concentrating principally on allocative efficiency (but also on some aspects of technical efficiency and progressiveness), researchers have confirmed a number of elements of market structure predicted by the theory of markets as significant determinants of performance. Allocative efficiency, measured by the price-cost margin or rate of return on investment, has been related to seller concentration, the various components of barriers to entry, the rate of growth of demand, the incidence of fixed costs, the extent of import competition, the extent of firms’ diversification, the structure of distribution channels, the subgroup organization of competing sellers, etc. Although most of this research has dealt with the United States economy, at least some of these structure-performance hypotheses have been confirmed for several other industrial countries as well, indeed, in one test the structure of these relations proved to be identical between two countries, the United Kingdom and United States (Khalilzadeh-Shirazi, 1973, chapter 3). The conventional structure-performance relations have gained strong statistical confirmation even in economies such as France and Japan where one might expect intervening private institutions and public policies to overwhelm them.

• Industrial Organization
• Market Structure
• Competition Policy

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This paper draws on continuing research carried out jointly with Michael E. Porter and contains various ideas that I owe to him. I am also grateful to William James Adams for many conversations about the potential value of international research designs.

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Caves, R.E. (1976). The Determinants of Market Structure: Design for Research. In: Jacquemin, A.P., de Jong, H.W. (eds) Markets, corporate behaviour and the state. Nijenrode Studies in Economics, vol 1. Springer, Boston, MA. https://doi.org/10.1007/978-1-4613-4376-9_1

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Market Research: A How-To Guide and Template

Discover the different types of market research, how to conduct your own market research, and use a free template to help you along the way.

MARKET RESEARCH KIT

5 Research and Planning Templates + a Free Guide on How to Use Them in Your Market Research

Updated: 02/21/24

Published: 02/21/24

Today's consumers have a lot of power. As a business, you must have a deep understanding of who your buyers are and what influences their purchase decisions.

Enter: Market Research.

Whether you're new to market research or not, I created this guide to help you conduct a thorough study of your market, target audience, competition, and more. Let’s dive in.

Table of Contents

What is market research?

Primary vs. secondary research, types of market research, how to do market research, market research report template, market research examples.

Market research is the process of gathering information about your target market and customers to verify the success of a new product, help your team iterate on an existing product, or understand brand perception to ensure your team is effectively communicating your company's value effectively.

Market research can answer various questions about the state of an industry. But if you ask me, it's hardly a crystal ball that marketers can rely on for insights on their customers.

Market researchers investigate several areas of the market, and it can take weeks or even months to paint an accurate picture of the business landscape.

However, researching just one of those areas can make you more intuitive to who your buyers are and how to deliver value that no other business is offering them right now.

How? Consider these two things:

• Your competitors also have experienced individuals in the industry and a customer base. It‘s very possible that your immediate resources are, in many ways, equal to those of your competition’s immediate resources. Seeking a larger sample size for answers can provide a better edge.
• Your customers don't represent the attitudes of an entire market. They represent the attitudes of the part of the market that is already drawn to your brand.

The market research services market is growing rapidly, which signifies a strong interest in market research as we enter 2024. The market is expected to grow from roughly $75 billion in 2021 to $90.79 billion in 2025 .

Free Market Research Kit

• SWOT Analysis Template
• Survey Template
• Focus Group Template

You're all set!

Click this link to access this resource at any time.

Why do market research?

Market research allows you to meet your buyer where they are.

As our world becomes louder and demands more of our attention, this proves invaluable.

By understanding your buyer's problems, pain points, and desired solutions, you can aptly craft your product or service to naturally appeal to them.

Market research also provides insight into the following:

• Where your target audience and current customers conduct their product or service research
• Which of your competitors your target audience looks to for information, options, or purchases
• What's trending in your industry and in the eyes of your buyer
• Who makes up your market and what their challenges are
• What influences purchases and conversions among your target audience
• Consumer attitudes about a particular topic, pain, product, or brand
• Whether there‘s demand for the business initiatives you’re investing in
• Unaddressed or underserved customer needs that can be flipped into selling opportunity
• Attitudes about pricing for a particular product or service

Ultimately, market research allows you to get information from a larger sample size of your target audience, eliminating bias and assumptions so that you can get to the heart of consumer attitudes.

As a result, you can make better business decisions.

To give you an idea of how extensive market research can get , consider that it can either be qualitative or quantitative in nature — depending on the studies you conduct and what you're trying to learn about your industry.

Qualitative research is concerned with public opinion, and explores how the market feels about the products currently available in that market.

Quantitative research is concerned with data, and looks for relevant trends in the information that's gathered from public records.

That said, there are two main types of market research that your business can conduct to collect actionable information on your products: primary research and secondary research.

Primary Research

Primary research is the pursuit of first-hand information about your market and the customers within your market.

It's useful when segmenting your market and establishing your buyer personas.

Primary market research tends to fall into one of two buckets:

• Exploratory Primary Research: This kind of primary market research normally takes place as a first step — before any specific research has been performed — and may involve open-ended interviews or surveys with small numbers of people.
• Specific Primary Research: This type of research often follows exploratory research. In specific research, you take a smaller or more precise segment of your audience and ask questions aimed at solving a suspected problem.

Secondary Research

Secondary research is all the data and public records you have at your disposal to draw conclusions from (e.g. trend reports, market statistics, industry content, and sales data you already have on your business).

Secondary research is particularly useful for analyzing your competitors . The main buckets your secondary market research will fall into include:

• Public Sources: These sources are your first and most-accessible layer of material when conducting secondary market research. They're often free to find and review — like government statistics (e.g., from the U.S. Census Bureau ).
• Commercial Sources: These sources often come in the form of pay-to-access market reports, consisting of industry insight compiled by a research agency like Pew , Gartner , or Forrester .
• Internal Sources: This is the market data your organization already has like average revenue per sale, customer retention rates, and other historical data that can help you draw conclusions on buyer needs.
• Focus Groups
• Product/ Service Use Research
• Observation-Based Research
• Buyer Persona Research
• Market Segmentation Research
• Pricing Research
• Competitive Analysis Research
• Customer Satisfaction and Loyalty Research
• Brand Awareness Research
• Campaign Research

1. Interviews

Interviews allow for face-to-face discussions so you can allow for a natural flow of conversation. Your interviewees can answer questions about themselves to help you design your buyer personas and shape your entire marketing strategy.

2. Focus Groups

Focus groups provide you with a handful of carefully-selected people that can test out your product and provide feedback. This type of market research can give you ideas for product differentiation.

3. Product/Service Use Research

Product or service use research offers insight into how and why your audience uses your product or service. This type of market research also gives you an idea of the product or service's usability for your target audience.

4. Observation-Based Research

Observation-based research allows you to sit back and watch the ways in which your target audience members go about using your product or service, what works well in terms of UX , and which aspects of it could be improved.

5. Buyer Persona Research

Buyer persona research gives you a realistic look at who makes up your target audience, what their challenges are, why they want your product or service, and what they need from your business or brand.

6. Market Segmentation Research

Market segmentation research allows you to categorize your target audience into different groups (or segments) based on specific and defining characteristics. This way, you can determine effective ways to meet their needs.

7. Pricing Research

Pricing research helps you define your pricing strategy . It gives you an idea of what similar products or services in your market sell for and what your target audience is willing to pay.

8. Competitive Analysis

Competitive analyses give you a deep understanding of the competition in your market and industry. You can learn about what's doing well in your industry and how you can separate yourself from the competition .

9. Customer Satisfaction and Loyalty Research

Customer satisfaction and loyalty research gives you a look into how you can get current customers to return for more business and what will motivate them to do so (e.g., loyalty programs , rewards, remarkable customer service).

10. Brand Awareness Research

Brand awareness research tells you what your target audience knows about and recognizes from your brand. It tells you about the associations people make when they think about your business.

11. Campaign Research

Campaign research entails looking into your past campaigns and analyzing their success among your target audience and current customers. The goal is to use these learnings to inform future campaigns.

• Define your buyer persona.
• Identify a persona group to engage.
• Prepare research questions for your market research participants.
• List your primary competitors.
• Summarize your findings.

1. Define your buyer persona.

You have to understand who your customers are and how customers in your industry make buying decisions.

This is where your buyer personas come in handy. Buyer personas — sometimes referred to as marketing personas — are fictional, generalized representations of your ideal customers.

Use a free tool to create a buyer persona that your entire company can use to market, sell, and serve better.

4. Focus Group Template

Focus groups are an opportunity to collect in-depth, qualitative data from your real customers or members of your target audience.

You should ask your focus group participants open-ended questions. While doing so, keep these tips top of mind:

• Set a limit for the number of questions you‘re asking (after all, they’re open-ended).
• Provide participants with a prototype or demonstration.
• Ask participants how they feel about your price.
• Ask participants about your competition.
• Offer participants time at the end of the session for final comments, questions, or concerns.

Download a free, editable Focus Group template here.

1. TikTok uses in-app research surveys to better understand consumer viewing preferences and ad experiences.

If you’re a TikTok enthusiast (like me), then you’ve probably been served a survey or two while you scroll through your For You feed.

TikTok has strategically started using in-app market research surveys to help improve the viewer experiences.

I’ve received two different types of surveys so far.

The first type typically follows a video or an ad and asks how I felt about the video I just viewed. There are options like “I don’t like this ad,” “I enjoyed watching this video,” or “This content is appropriate.”

The other type of survey I’ve gotten asks if I’ve recently seen a sponsored video or ad from a particular brand. For example, “Did you see any promotional content from the Dove Self Esteem Project in the past two days on TikTok?

TikTok can then use this information to tweak my algorithm to match my preferences or to serve ads that are more in line with my buying behaviors.

2. Taco Bell tests new products in select markets before launching nationwide.

Taco Bell is known for their innovative, consumer-driven menu items. In fact, just last year, they gave Taco Bell rewards members exclusive access to vote on the newest round of hot sauce sayings .

This popular fast-food chain puts a lot of menu decisions in the hands of their target market. Taco Bell lovers ultimately determine which new menu items stay on the menu through voting and, ultimately, their purchase behaviors.

(Let’s all collectively agree that the Cheez-It Crunchwrap deserves a permanent spot.)

Often, this process of releasing a new item is done regionally before a nationwide launch. This is a form of market research — soft launching products in smaller markets to determine how well it sells before dedicating too many resources to it.

The way Taco Bell uses this information is pretty straightforward. If the product is not successful, it’s unlikely to be released on a national scale.

3. The Body Shop used social listening to determine how they should reposition brand campaigns to respond to what their customers cared most about.

The Body Shop has long been known for offering ethically sourced and natural products, and proudly touts “sustainability” as a core value.

To dive deeper into the sustainability subtopics that meant the most to their audiences, the team at The Body Shop tracked conversations and ultimately found their audiences cared a lot about refills.

Using this information helped the Body Shop team feel confident when relaunching their Refill Program across 400 stores globally in 2022 .

Market research proved they were on the right track with their refill concept, and demonstrated increased efforts were needed to show Body Shop customers that the Body Shop cared about their customers' values.

Conduct Market Research to Grow Better

Conducting market research can be a very eye-opening experience. Even if you think you know your buyers pretty well, completing the study will likely uncover new channels and messaging tips to help improve your interactions.

Editor's note: This post was originally published in March 2016 and has been updated for comprehensiveness.

Don't forget to share this post!

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Market Structure: Definition, Features, Types And Examples

August 23, 2023 | By Hitesh Bhasin | Filed Under: Marketing

Market structure is a concept in economic theory that classifies firms based on the types of goods and services they sell (homogeneous or heterogeneous) and how external factors affect their operations. Understanding market structure helps to comprehend the unique features of different markets.

Table of Contents

What is Market Structure?

Market structure is the way in which different industries are categorized and distinguished based on the level and type of competition for goods and services. A market structure refers to the economic setting in which a business functions. It characterizes the competitiveness of the industry through aspects such as the level of difficulty in joining the industry and the number of sellers involved.

Market structure can be divided into four main categories: perfect competition, monopolistic competition, oligopoly , and monopoly. The market structure depends on several factors, such as the number of buyers and sellers, bargaining power, level of competition, product differentiation, and market accessibility.

Key Takeaways

• The term “market structure” refers to the conditions in which a business operates, including variables such as competition levels, barriers to entry , and product differentiation .
• There are four primary market structures: perfect competition, monopolistic competition, oligopoly, and monopoly.
• When there are several competitors in a market, it increases the chances of fair and competitive prices for customers. In cases of oligopoly and monopoly markets, companies may be prevented from charging unjust prices through government regulations.
• To understand the market structure of an industry, it is important to consider the number and type of firms that operate in a given market. Specialized firms, capital markets, and market participants are all aspects to consider.

Importance of Market Structure

Understanding the market structure is crucial in determining the appropriate business strategy for a company . It impacts the level and type of competition, which, in turn, affects pricing , product differentiation, and various other operational aspects. Having knowledge of the market structure is critical to operating and expanding a business successfully in a specific market. It helps in analyzing market outcomes and optimizing market performance.

By examining the various market structures, businesses can gain a better understanding of how to effectively cater to their intended customer base and surpass their rivals. This may involve devising plans that heighten their competitive edge, enhance customer satisfaction , and generate fresh product advancements. By comprehending the market structure, organizations can pinpoint promising markets for expanding their operations and determine the most efficient method for entering those markets.

Knowing different market structures can significantly impact a company’s drive, choices, and options, which in turn affects market results such as costs, product accessibility, and range. By analyzing market structure, businesses can anticipate potential opportunities and threats that can impact their operations and market dominance. This knowledge helps companies adapt their procedures and stay competitive in meeting market needs.

Types of Market Structures

1) perfect competition.

A perfectly competitive market is characterized by a large number of small firms producing a homogenous product, no barriers to entry or exit, perfect information about prices, and no externalities. This type of market structure leads to a market price that is determined by the interaction of supply and demand.

Perfect competition is a situation where numerous small companies compete with each other. These companies offer similar products that have no price difference, and they don’t have control over the market price. They also have the freedom to enter or exit the market.

In a perfect competition market structure, there are numerous companies competing with each other. Although economists don’t specify the exact number of companies required, the idea is that each company’s influence on the market should be minimal. Due to the absence of significant barriers to entry, competition in this market structure is high.

Perfect competition characteristics

• It has an infinite number of buyers and sellers.
• All firms produce a homogeneous product with no brand differentiation and there are no major differences in quality.
• There is perfect knowledge about the prices and products of other companies in the market.
• There are no barriers to entry or exit.
• Firms cannot influence the market price of their products and are therefore considered price takers.

2) Monopolistic Competition

Monopolistic competition is a type of market that combines features of a monopoly and competitive market, resulting in an imperfectly competitive structure. In a market, there are numerous producers and consumers , and no single business has complete authority over setting the market price. Competing products are believed to have distinguishing features beyond their prices, according to consumers.

In this type of imperfect competition, sellers can set themselves apart by offering higher-quality products and using distinctive branding . It has become increasingly popular for businesses to differentiate their products in a variety of ways such as design, features, and services.

Monopolistic Competition Characteristics

• It has a large number of firms, each producing slightly different products.
• There are few barriers to entry and exit.
• The products have some differentiation, such as branding.
• Perfect knowledge is not available to buyers and sellers.
• Firms can set their own prices and have the ability to influence the market prices of their products.

3) Oligopoly

An oligopoly market definition is characterized by a limited number of major sellers who sell their products to a large group of customers. Getting started in an industry can be tough because of high initial costs and patent requirements. However, joining an oligopoly is generally easier than trying to join a monopoly. There are only a few big companies that sell either unique or similar products.

Because there are only a few players in the market, their competitive strategies are interconnected and influenced by one another. In the market, companies can either sell the same products in perfect competition or sell different products in monopolistic competition. The main distinction is that every company possesses sufficient market power to impact its rivals.

Oligopoly Characteristics

• There are only a handful of firms in the industry. As a result, these firms are highly interdependent, and one firm’s actions can significantly impact the others’ decisions.
• Oligopolies have the ability to set prices, instead of simply responding to market prices.
• Entry into this field is challenging due to various factors such as economies of scale, access to expensive and complex technology, patents, and strategic actions by existing companies aimed at dissuading or eliminating new companies.
• The product could either be the same throughout or have variations.
• In oligopolies, competition usually takes place through non-price methods such as offering loyalty schemes, advertising , product differentiation, etc.
• Oligopolies can maintain long-term profits by creating barriers that prevent new companies from entering the market and competing against them. This lack of competition allows oligopolies to keep excess profits.

4) Monopoly

A monopoly is a market structure in which there is only one supplier of a particular product or service. The monopolist has complete control over the price and quantity of the product or service. Entry barriers such as high startup costs, limited resources, and patents often lead to a lack of competition in a pure monopoly market structure.

Monopolies are characterized by a lack of competition in the marketplace and, as a result, the monopolist is able to set prices and outputs that may be higher than what they would be in a competitive market. Monopolies also tend to have higher barriers to entry, preventing new competitors from entering the market and competing against them.

The monopolist’s market share reveals actual customer demand for the product or service, as opposed to the entire market demand . Because there is only a single supplier, the monopolist can set prices without having to worry about other firms responding with competitive pricing . This means that the monopolist can charge more for the product or service than would be possible in a competitive market.

Monopoly Characteristics

• Single supplier of a product or service
• High barriers to entry
• No competition
• Ability to set prices without competition
• Market share reveals actual customer demand rather than the entire market demand
• Only a few buyers are in the market, meaning that their buying power is limited
• Excess profits can be kept by the monopolist due to lack of competition.

Table for Market Structure Analysis

Market structure examples.

Let’s have a look at different examples of market structures and understand their key features –

Perfect competition example

At a farmer’s market, multiple sellers and buyers come together. Typically, the products and prices do not vary greatly across different farmer’s markets except for those labeled as organic. The methods used to grow the produce and their packaging/branding don’t have a significant impact.

Hence, if one of the farms supplying goods to the market shuts down, the average prices are unlikely to be impacted. Some of other examples of perfect competition can be supermarkets or the technology industry.

Monopolistic competition example

The restaurant industry is a great example of monopolistic competition. Despite numerous restaurants, each individual establishment offers something unique to the customers — decor, menu offerings, ambiance, customer service , etc. Restaurants are able to differentiate themselves from their competitors and establish a loyal customer base. Even though customers may switch between different restaurants, they are likely to return back to their favorite one.

Hence, industries characterized by monopolistic competition include restaurants, hair salons, household items, and clothing. This means that products like dish soap or hamburgers are sold by various companies in competition with each other, with each company having its own marketing strategies and pricing.

Oligopolistic example

The automobile industry is an example of an oligopoly. A few large companies make up the majority of the market share and own almost all car manufacturers in the world. These companies use strategic pricing, product placement , and advertising to keep their competitors at bay. The market structure in this industry is such that it is difficult for new companies to enter the market and compete with existing players.

Therefore, industries characterized by oligopoly include automobiles, airlines , steel producers, petrochemical and pharmaceutical companies, etc. They all operate in an environment with few players, high barriers to entry, and considerable price stability.

Monopoly example

Google is a great example of a monopoly market. It dominates the search engine market with no close competitors. Google controls search engine algorithms, ads, content, and other services. Google’s market share is so dominant that it can set prices without the fear of competition.

The largest search engine has a market share of over 70% thanks to its proprietary algorithm. Furthermore, the company has expanded into various interconnected web services such as maps, Gmail , and search engines. Due to its innovative and advanced technology, the company has surpassed its competitors, Yahoo and Microsoft .

Some other examples of real-life monopolies are railway companies, Luxottica, AB InBev, Microsoft, patented products, Facebook , AT&T, and Apple . All these companies enjoy high market share, have a strong brand presence, and can make decisions without the fear of competition.

Conclusion!

To conclude, it is important to understand market structure is essential for any business, as it helps to determine the marginal revenue and performance of the company in realistic market conditions. It is also important to recognize the various other market structures such as oligopolies, monopolies, and duopolies, in order to understand how the market competition will affect the market. Taking these things into consideration will help businesses make informed decisions and be successful in their respective markets.

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Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about.

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Quickonomics

The Four Types of Market Structure

Four basic types of market structure characterize most economies: perfect competition, monopolistic competition, oligopoly, and monopoly. Each of them has its own set of characteristics and assumptions, which in turn affect the decision-making of firms and the profits they can make.

It is important to note that not all of these market structures exist in reality; some of them are just theoretical constructs (which can be really useful in economics sometimes). Nevertheless, they are critical because they help us understand how competing firms make decisions. With that said, let’s look at the four market structures in more detail.

1. Perfect Competition

Perfect competition describes a type of market structure where a large number of small firms compete against each other. In this scenario, a single firm does not have any significant market share or market power. As a result, the industry as a whole produces the socially optimal level of output because none of the firms can influence market prices.

Perfect competition is defined by the following characteristics:

• All firms maximize profits
• Entry and exit to the market are free (i.e., no barriers to entry or exit)
• All firms sell entirely identical (i.e., homogenous) goods
• There are no consumer preferences.

By looking at those assumptions, it becomes obvious that we will hardly ever find perfect competition in reality. This is important to note because it is the only market structure that can (theoretically) result in a socially optimal level of output.

Probably the best example of an almost perfectly competitive market we can find in reality is the stock market. If you are looking for more information on different types of competitive firms, you can also check our post on perfect competition vs. imperfect competition .

2. Monopolistic Competition

Monopolistic competition also refers to a type of market structure where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar but slightly differentiated products. That gives them a certain degree of market power despite small market shares, which allows them to charge higher prices within a specific range.

Monopolistic competition is defined by the following characteristics:

• All firms are profit-maximizing
• Firms sell differentiated products
• Consumers may prefer one product over the other (however, they are still very close substitutes).

Note that those assumptions are a bit closer to reality than the ones we looked at in perfect competition. However, this market structure no longer results in a socially optimal level of output because the firms have more power and can influence market prices to increase their total revenue and profit at the expense of the consumers.

An example of monopolistic competition is the market for cereals. There is a vast number of different brands (e.g., Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals.

3. Oligopoly

An oligopoly describes a market structure that is dominated by only a small number of firms that serve many buyers. That results in a state of limited competition. The firms can either compete against each other or collaborate (see also Cournot vs. Bertrand Competition ). By doing so, they can use their collective market power to drive up prices and earn a higher profit.

An oligopoly market is defined by the following characteristics:

• Oligopolies can set prices (i.e., they are price-makers)
• Barriers to entry and exit exist in the market
• Products may be homogeneous or differentiated
• Only a few firms dominate the market.

Unfortunately, it is not clearly defined what a “few firms” means precisely. As a rule of thumb, we say that an oligopoly typically consists of about 3-5 dominant firms.

To give an example of an oligopoly, we can look at the gaming console industry. This market is dominated by three powerful companies: Microsoft, Sony, and Nintendo. That leaves all of them with a significant amount of market power.

4. Monopoly

A monopoly refers to a type of market structure where a single firm controls the entire market. In this scenario, the firm has the highest level of market power, as it supplies the entire demand curve and consumers do not have any alternatives. As a result, monopolies often reduce output to increase prices and earn more profit.

A monopoly is defined by the following characteristics:

• The monopolist is profit-maximizing
• It can set the price (i.e., it is the price-maker)
• There are high barriers to entry and exit
• Only one firm dominates the entire industry.

From the perspective of society, most monopolies are not desirable because they result in lower outputs and higher prices compared to competitive markets. Therefore, they are often regulated by the government.

An example of a real-life monopoly could be Monsanto. This company trademarks about 80% of all corn harvested in the US, which gives it a high level of market power. You can find additional information about monopolies in our post on monopoly power .

Frequently Asked Questions (FAQ)

How do real-world markets deviate from the ideal types of market structures outlined in the theory, especially in dynamic industries like technology.

Real-world markets often blend characteristics from different theoretical models, especially in dynamic sectors like technology, where innovation and strategic behaviors create more complex scenarios than those described by pure market structures.

What role does government regulation play in shaping and maintaining these market structures, and how do these regulations impact competition?

Government regulations are pivotal in shaping market structures, employing antitrust laws and policies to foster competition, prevent monopolistic dominance, and protect consumer interests, thereby influencing the competitive landscape.

How do market structures evolve over time with technological advancements and changing consumer preferences?

Market structures are not static; they evolve over time as a result of technological advancements, shifts in consumer preferences, and changes in regulatory landscapes. These evolutions can disrupt existing market equilibriums, leading to the emergence of new business models and the decline of others.

There are four basic types of market structure in economics: perfect competition, imperfect competition, oligopoly, and monopoly. Perfect competition describes a market structure where a large number of small firms compete against each other with homogeneous products. Meanwhile, monopolistic competition refers to a type of market structure where a large number of small firms compete against each other with differentiated products. An Oligopoly describes a market structure where a small number of firms compete against each other. And last but not least, a monopoly refers to a type of market structure where a single firm controls the entire industry.

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Research and Analysis - Market Structure

Data highlights, reports on security-based swaps.

• Report on Security-Based Swaps (Issued on November 17, 2023) Report (pdf, 381kb), November 17, 2023
• Report on Security-Based Swaps (Issued on March 20, 2023) Report (pdf, 661kb), March 20, 2023
• Report on Security-Based Swaps (Based on Trade State Data for March 31, 2022) - Report (pdf, 284kb), July 15, 2022

White Papers

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• Empirical Analysis of Liquidity Demographics and Market Quality For Thinly-Traded NMS Stocks Research Note (pdf, 3.8 mb), April 2018
• An application of agent-based modeling to market structure policy: the case of the U.S. Tick Size Pilot Program and market maker profitability White Paper (pdf, 1.9 mb), December 2017

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Fixed Income Market Structure Compendium

2023 market metrics & themes.

Report Highlights

A Conversation with Coalition Greenwich:

• Electronic trading – Treasuries ~2/3 notional volume; IG corporates 42%, HY 30%.
• Surprise – corporate bond trade count +20% in 2023, due to retail investors.
• Trends – Treasury clearing/big market change, AI/sophisticated screeners, Basel III Endgame/constraining capital allocation. Dealer positions – primary dealer corporate bond holdings dropped 77% between 2017 and 2022, while trading volume grew 29%.
• Treasury volumes – breaking $900B ADV; market dynamics keep volumes high. Volatility – MOVE index sustainably high but has come down; 2021 = 61.84, 2022 = 120.23, 2023 = 121.66, YTD 106.84.

Market Themes:

• UST Issuance – issuance estimated to be almost $4T for FY23 + 1Q24, +305.7% to historical average. Treasuries outstanding at $26.4T (U.S. government interest payable at $81.5B, +17.4% Y/Y).
• UST Holders – Treasury demand has shifted. Fed holds 18.1%, now selling. Foreign holds 31.2%, top two (Japan, China) now selling. Demand is now taken up by asset managers & hedge funds, which are price sensitive.
• Federal Debt – now $34.0T, +54.4% in five years and the trend is increasing (Y/Y changes): +3.5% in 1Q23, +5.8% in 2Q23, +7.2% in 3Q23, and +8.2% in 4Q23. An unsustainable trajectory.
• MOVE vs. VIX – correlations b/t equity (VIX) & bond (MOVE) volatilities shifted from 0.6238 since 2000 to 0.2276 since 2001 (-63.5%) & 0.5640 in 2023 (-9.6%). Equity investors more complacent around market movements.

Market Metrics (2023 average, Y/Y change):

• Total – issuance $8.3T, -6.3%; ADV $1.1T, +9.0%; outstanding $43.0T, +6.5%.
• UST – issuance $3.5T, -8.1%; ADV $760.5B, +11.0%; outstanding $26.4T, +10.2%.
• Corporates – issuance $1.4T, +5.4%; ADV $42.5B, +6.6%; outstanding $10.6T, +1.6%

Katie Kolchin, CFA Director of Research

Related Resources

Understanding fixed income markets in 2023, research quarterly: fixed income outstanding, sifma insights primers, us fixed income market structure primer, primary, secondary & post-trade markets, global capital markets & financial institutions primer, sector-specific primers, more research, economist roundtable flash poll: 1q24.

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Johor & Batam DCI Report 2024: Data Centre Colocation, Hyperscale Cloud & Interconnection

$ 8,500.00 USD

Description

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The narrative around the Johor data centre market has quickly transitioned from being an overflow scenario for the Singapore market to being seen as the first and most important AI data centre hub in the Asia-Pacific region. The growth in Johor was initially triggered by the data centre build pause put in place by the Singaporean government, which effectively halted the development of new data centre supply. And while the moratorium was recently lifted, new data centre expansions will be subject to close scrutiny and probably be limited to a certain subset of operators. This will open the door to more self-builds from hyperscalers, which will have implications for colocation demand.

Given the current constraints in data centre supply impacting the Singapore market, the logical question is what next given that demand is accelerating as a new wave of AI-related infrastructure begins to roll out. Enter the overflow scenario. And in the context of Singapore, two nearshore locations have emerged – Johor in Malaysia and Batam in Indonesia – to try and accommodate the demand that Singapore will be less and less equipped to serve over the long-term.

The overflow scenario is still a relatively new development and the initial wave of demand is being driven by hyperscale cloud platforms. In Singapore, this has been led by China-based hyperscalers that typically do not self-build outside China and have not planned for future growth as diligently as their US counterparts. The overflow scenario is a good fit for the China-based hyperscalers and they have driven the first wave of expansion. But the US-based hyperscalers are going to follow suit as their requirements continue to expand, and expansion runway in Singapore will increasingly be hard to come by.

Hyperscale cloud demand will continue to drive the market, but AI has the potential to accelerate things in an aggressive direction. Places like Johor are uniquely positioned to serve large-scale AI workloads in a commercially viable and scalable model, while being proximate enough to enable core-edge deployment separation.The Johor and Batam overflow markets are still in their early stages of development. But the potential is there and a pipeline of over 2,000MW (or 2GW) is currently in various stages of development. This is a market geared towards hyperscale capacity and the average data centre build size is 29MW. These builds will soon start to come online, and the combination of hyperscale cloud and AI threatens to push demand to a level where there could even be shortfalls. It is a truly wide open market and the long-term upside is real.

This report is an excellent resource for any service provider, investor or enterprise end user looking to understand and project the data centre market in Johor and Batam or find a service provider. The methodology applied continues to be the most robust in the industry. We track supply on a space and power basis, split all the metrics along retail and hyperscale lines, and aggregate inventory in multiple tiers according to build status, absorption rates and maximum capacity levels. Hyperscale cloud nodes and on-ramps are mapped and a complete directory is provided.

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Philippines (Manila) DCI Report 2023: Data Centre Colocation, Hyperscale Cloud & Interconnection

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Stock buybacks in defense: What drives them, and how that can change?

Recent comments by U.S. Navy Secretary Carlos del Toro have reignited a long-running issue of contention between Department of Defense officials and the management of the largest publicly traded defense prime contractors — stock buybacks. Specifically, some senior DOD officials have raised concerns when companies that are doing business with the DOD use remaining capital to buy back existing shares of company stock in lieu of additional investments in research and development, or production capacity .

The secretary is rightly focused on the need for increased investment to facilitate greater innovation and production capacity for strategic competition with China. The management teams of some large defense primes, on the other hand, buy back shares as an efficient way to return value to shareholders after considering the attractiveness of investment opportunities available to the company.

Changing this situation and spurring increased investment in the defense market requires addressing the incentive structures that guide market behavior, including stock buybacks.

Before examining market incentives, it is worth noting that the U.S. government decided many decades ago to largely privatize the defense-industrial base . While the DOD retains a modest number of government-owned arsenals, shipyards and depots, the vast majority of the systems developed and services conducted for the DOD are performed by for-profit companies. These companies have developed the innovations and capabilities that have made U.S. forces the best in the world.

This industrial base includes approximately 200,000 small, medium and large companies , the vast majority of which are privately held. Including those traded on foreign exchanges, there are only about 100 companies that are publicly traded. And only a very small fraction of those companies use share buybacks consistently as a strategic management tool.

Secretary del Toro captures the essence of the anti-buyback argument, which has been articulated by Pentagon leaders for years: “You can’t be asking the American taxpayer to make even greater public investments while you continue, in some cases, to goose your stock prices through stock buybacks, deferring promised capital investments, and other accounting maneuvers.”

Why do defense companies continue to pursue stock buybacks? It is principally the large mature defense primes such as Lockheed Martin, Northrop Grumman and HII that buy back stock. These firms are profitable , generate significant cash flow, have a relatively low cost of capital and are not highly leveraged.

Lack of capital is not a problem hindering investment at the largest defense primes. The issue revolves around the capital allocation decision. If large defense primes are not making significant investments, it is because they believe that this incremental dollar is unlikely to materialize into a profitable contract in the future. For that to change, these primes need to see a better return for the earnings they intend to retain and reinvest. Those returns could come through an increased number of growth opportunities, a greater frequency and volume of competitions, or margin improvement.

In contrast to the large mature primes, smaller publicly traded companies such as AeroVironment and Kratos do not typically buy back shares. They are instead investing in growth, as they see significant opportunities in their own market segments and beyond as the DOD spends heavily in unmanned systems, advanced electronics, autonomy and other areas central to the National Defense Strategy. If similar, larger incentives existed for the larger primes, then that is where capital would be allocated.

Bigger budgets obviously help incentivize investment, but changing how the DOD buys through practices such as open architectures , multiyear contracts and multiple production lines will likewise create more contract opportunities and therefore that stronger demand signal that industry needs to invest.

The DOD is heading in that direction in several important ways, and more emphasis there would be productive. Adopting some of the recent recommendations of the congressional commission on defense planning, programming, budgeting and execution reform, for example, could substantially contribute toward improving incentive structures.

Another promising avenue the DOD can use to incentivize investment by the larger primes revolves around program performance. Secretary del Toro has justly emphasized in his recent remarks that “industry must deliver platforms and capabilities on time and on budget for the sake of our warfighters who are in harm’s way.”

How about, for example, rewarding contractors with substantial profit-margin expansion opportunities for delivering ahead of terms, and punishing them more severely for missing the mark? The beauty of a commercially viable defense industry is that its participants are responsive to incentives.

Ultimately, management at for-profit companies are stewards of others’ capital. Browbeating the financial practices of industry alienates firms large and small. Let’s work instead to change some of the incentive structures in the defense market. Addressing these will help foster the innovation and investment we need in our industrial base as well as reducing stock buybacks along the way. And it is ultimately that vibrant public-private partnership we need to confront today’s daunting national security challenges.

Jerry McGinn is the executive director of the Greg and Camille Baroni Center for Government Contracting at George Mason University and a former senior U.S. Defense Department acquisition official. Mikhail Grinberg is a partner at Renaissance Strategic Advisors and a member of the center’s advisory board. Lloyd Everhart is a research manager at the center.

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