Market

A market is defined as the sum total of all the buyers and sellers in the area or region under consideration. The area may be the earth, countries, regions, states, or cities. The value, cost, and price of items traded are as per forces of supply and demand in a market. The market may be a physical entity or maybe a virtual one. It may be local or global, perfect and imperfect.

Market - Different Perspectives

• The Economist's Perspective
  

The term 'market' as used by economists has a different meaning from ordinary usage. It does not mean literally the physical place in which commodities are sold or purchased (as in 'village market'), nor does it mean the stages that a commodity passes through between the producer and the consumer (as in marketing channels). Rather it refers in an abstract way to the purchase and sale transactions of a commodity and the formation of its price. Used in this way, the term refers to the countless decisions made by producers of a commodity (the supply side of the market) and consumers of a commodity (the demand side of the market), which taken together determine the price level of the commodity ... the term is detached from any particular geographical coverage. The geographical scope of the term depends on the context in which it is being used. It may refer to the local situation in some part of the rural economy, for example, the market for cassava in southern Tanzania, or it can refer to the country as a whole, the region, or the international economy. Thus the expression 'world market' refers to the process of price formation at an international level for traded agricultural commodities.

• The Business Perspective
  

Business people tend to use the term 'market' to describe the groups of individuals or organizations that make up the pool of actual and potential customers for their goods and services. These groups fall into one or more of the following categories: geographic, demographic or socioeconomic, psychographic, behavioral or sectoral.

• The New Institutional Economics' perspective
  

Markets are a type of 'institution' or mechanism that exists to facilitate the exchange, coordination and allocation of resources, goods, and services between buyers and sellers, between producers, intermediaries, and consumers; competitive markets can provide 'efficient' co-ordination by reducing the cost and risk of carrying out transactions, can encourage business development and also help to achieve broader economic objectives. But markets are not always competitive or efficient. Markets as an institution can be imperfect.

Terms Related to Market

• Free Market Economy: A free market economy is dictated by supply and demand. "Free" refers to the lack of governmental control over price and production.
• Market Failure: Market failure occurs when an imbalance exists between supply and demand. More of a product is produced than is demanded, or more of a product is demanded than is produced.
• Complete Market: A complete market is one that has components in place to address virtually any eventual circumstance.

Classification of Market
Markets can be classified as perfectly competitive and imperfectly competitive or monopolies, depending on their features.

• A perfectly competitive market is a hypothetical market where competition is at its greatest possible level. Neo-classical economists argued that perfect competition would produce the best possible outcomes for consumers and society. Perfectly competitive markets exhibit the following characteristics:
  • There is perfect knowledge, with no information failure or time lags in the flow of information. Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited.
  • Given that producers and consumers have perfect knowledge, it is assumed that they make rational decisions to maximize their self-interest – consumers look to maximize their utility, and producers look to maximize their profits.
  • There are no barriers to entry into or exit from the market.
  • Firms produce homogeneous, identical, units of output that are not branded.
  • Each unit of input, such as units of labor, are also homogeneous.
  • No single firm can influence the market price or market conditions. The single firm is said to be a price taker, taking its price from the whole industry. The single firm will not increase its price independently given that it will not sell any goods at all. Neither will the rational producer lower the price below the market price given that it can sell all it produces at the market price.
  • There are very many firms in the market – too many to measure. This is a result of having no barriers to entry.
  • There is no need for government regulation, except to make markets more competitive.
  • There are assumed to be no externalities, that is no external costs or benefits to third parties not involved in the transaction.
  • Firms can only make normal profits in the long run, although they can make abnormal (super-normal) profits in the short run.
• An Imperfectly competitive market or the model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. Monopolistically competitive markets exhibit the following characteristics:
  • Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.
  • Knowledge is widely spread between participants, but it is unlikely to be perfect. For example, diners can review all the menus available from restaurants in a town, before they make their choice. Once inside the restaurant, they can view the menu again, before ordering. However, they cannot fully appreciate the restaurant or the meal until after they have dined.
  • The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision-making.
  • There is the freedom to enter or leave the market, as there are no major barriers to entry or exit.
  • A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation: Physical product differentiation, where firms use size, design, color, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated. Marketing differentiation is where firms try to differentiate their product through distinctive packaging and other promotional techniques. For example, breakfast cereals can easily be differentiated through packaging. Human capital differentiation is where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms, and so on.
  • Differentiation through distribution, including distribution via mail order or through internet shopping, such as Amazon.com, which differentiates itself from traditional bookstores by selling online.
  • Firms are price makers and are faced with a downward-sloping demand curve. Because each firm makes a unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to ‘take’ it from the industry as a whole, though the industry price may be a guideline, or becomes a constraint. This also means that the demand curve will slope downwards.
  • Firms operating under monopolistic competition usually have to engage in advertising. Firms are often in fierce competition with other (local) firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences. Common methods of advertising for these firms are through local press and radio, local cinema, posters, leaflets, and special promotions.
  • Monopolistically competitive firms are assumed to be profit maximizers because firms tend to be small with entrepreneurs actively involved in managing the business.
  • There are usually large numbers of independent firms competing in the market.

Market Size
Market size is the number of individuals in a certain market segment who are potential buyers. Companies should determine market size before launching a new product or service. Understanding market size helps you distinguish between two categories: the addressable market, which is the total revenue opportunity for your product or service; and the available market, which is the portion of the addressable market for which you can realistically compete. By outlining the difference between these two, you can develop a product offering to tackle that consumer sweet spot.

See Also

• Market Analysis
• Market Cap
• Market Driven Organization
• Market Forces
• Market Research
• Target Market
• Product/Market Fit
• Product/Market Grid
• Marketing
• Market Maturity

• Sales and Operations Planning (S&OP)