Industry Analysis/Mkt Definition Analysis of customers, competitors and industry are interdependent. Require balance between identifying too many and too few competitors. Many bases for competition. Different levels of competition.

Industry Analysis/ Mkt Definition Bases of Competition 1. Customer oriented (Who they are; When they use it; Why they use it) 2. Marketing oriented (Theme/copy strategy; Media; Distribution; Price) 3. Resource oriented (Raw materials; Employees; Financial resources) 4. Geographic Levels of Competition- 1. Product form; 2. Product category; 3. Generic; 4. Budget

Industry Analysis/Mkt Definition Methods of determining competition: 1. Existing categories 2. Technical feasibility of substitution 3. Managerial judgement

Industry Analysis/Mkt Definition Methods for determining competition (contd.): 4. Customer behavior based - Brand switching - Interpurchase times - Cross elasticity of demand 5. Customer judgement based - Overall similarity - Similarity of consideration sets - Product deletion - Substitution in use

Competitor Identification Identifying competitors by identifying substitutes Substitutes are products whose cross- price elasticities of demand are positive There is a distinction between direct and indirect competitors Similar products in different geographic markets may not be substitutes

Discussion question What do you think is the Antitrust approach to market definition?

Market Definition Market definition describes the market in which a firm competes Two firms are in the same market if they constrain each others ability to raise price Suppose all firms collectively set prices to maximize combined profits. Would they choose to raise prices by a least 5%?

Market definition If the own-price elasticity of a group of firms collectively is small, then this group of firms constitutes a well-defined market Antitrust agencies (Dept of Justice) looks at the above

Market Structure and Competition Market structure refers to the number and distribution of firms in a market Common measures are N-firm concentration ratio and Herfindahl index The Herfindahl index of an industry depends on the nature of competition in the industry

A typology of competition Perfect competition: - many sellers - homogenous products -well-informed consumers can costlessly shop around

A typology of competition Monopoly: - no competition for output Monopolistic competition: -many sellers -each sells a differentiated product Oligopoly: -few sellers, so the actions of one firm materially affects the others

A Tool for Assessing Industry Attractiveness: Porter’s Five Forces Rivalry among existing industry firms Threat of substitute products Bargainingpower of buyers Bargainingpower of suppliers Threat of new entrants entrants