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In the words of Cournot, French Economist, Economists understand by the term market not any particular market place in which things are bought and sold but the whole of any region in which buyers and sellers are in such free inter course with one another that the prices of same goods & services tend to equality easily and quickly. Thus Market is a real or imaginary place where goods and services are traded.
Essentials of Market
1. 2. 3. 4. Good or service to be traded. Buyers and sellers A place, be it with real boundaries or imaginary (like world market) Contact between buyers and sellers
Markets, on the basis of goods or services traded between, can be classified as goods or commodity market or it can be factor market for services. However, the popular basis of market structure is the factors that form the environment of market.
Market Environment
The following are the main factors that form the environment of market and the markets are usually classified on the basis of these factors. 1. The number of buyers and sellers. 2. The nature of product produced. Whether it is homogenous or differentiated ? 3. Price elasticity of demand. 4. Ease of entry into an industry. 5. Degree of control over price (Regulated or deregulated).
Classification of Market
On the basis of the above, the markets are classified to be 1. 2. Perfect Competition Imperfect Competition
1. Perfect Competition
1. 2. 3. 4. 5.
Large no of sellers & buyers number Homogeneous products perfectly Free entry and exit. Perfect knowledge of price cost (no control over price) Perfectly price elastic demand imperfect competition.
2. Imperfect Competition
Monoplistic Competition Oligopoly Monoply Monopolistic Competition 1. 2. 3. 4. 5. Oligopoly 1. Few producers 2. Homogenous (Pure Oligopoly) and differentiated but close substitutes (Differentiated Oligopoly) 3. Barriers to entry 4. Small control (Pure Oligopoly) large control (Differentiated Oligopoly) over price 5. P.E of D. small (Pure Oligopoly) large (Differentiated Oligopoly) Monopoly 1. 2. 3. 4. 5. Single firm Perfectly differentiated product without close substitute Very strong barriers to entry Extreme control over price Near to in elastic price elasticity of demand Large no of sellers and buyers Differentiated products which are close substitute. Free entry but firms can produce only close substitutes. Some control our price. Less than perfectly price elastic demand.
Market Failures
At times, markets fail to deliver optimally and rationally. Resultantly, it starts hurting either buyer or seller of a good or service. The non market forces, (like Government) have to interfere. The idea is to operate on a buffer in order to safeguard the vulnerable strata of the society. Fair prices, taxes, subsidies etc are instruments thus used to encourage production of merit goods and discourage production of non merit goods.
Market Equilibrium
The demand and supply are the market forces that work in opposite direction with equal strength in order to bring the transactors to a bargaining point wherein they make a deal. The equilibrium in this context is referred to a situation in which demand equals the supply and the market is cleared at a price called equilibrium price. In free market mechanism, demand and supply are the only factors that determine the equilibrium and the equilibrium price. Let us suppose, we have a product xfor which Dx is demand curve and Sx is its supply curve. When left alone, they interact and cross each other at point e. At e Sx=Dx where OP is the price and OQ is the quantity. The market is said to be in equilibrium as Quantity demanded = Quantity supplied OPand OQ are the equilibrium price and equilibrium quantity respectively. Mathematically Dx = f(Px) Sx = f(Px) At equilibrium Dx = Sx = f(Px) = law of demand = law of supply ( demand for x is function of price of x) ( supply of x is function of price of x )
Overcharging Strategy
In this strategy the company overprices the product regarding to its quality. After some time customers will stop buying.
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ACQUISITION
To buy a patent or license to produce others product.
1. Idea Generation
To start a new product it is needed to make a system, search for new product ideas. To develop a new product the company has to generate so many ideas. For example, Pharmaceutical companies may require about 8000 starting ideas for a successful new product. Resources to Generate Ideas
Ideas for new product development includes internal sources. Successful companies have developed a system, which encourage every employee to contribute his part to seek new ways of improving production, product and services. Kodak claims that it gives monetary, holidays, or recognition award for those employees who submit the best ideas. Researching competitors products and services is a good source of generating new ideas. Distributors and suppliers can well contribute in developing a new product idea, because they are very close to the market and know about the problems and possibilities of new product. Suppliers can also give help, concepts and materials that can help in the new product development. Top management is another source of new ideas generation. Former CEO of Poland, Edwin H. Land took responsibilities for technology innovation in their companies. Other sources of generation ideas include investors, marketing research firms, industrial publication, and advertising agencies.
2. Idea Screening
When the company collect ideas from different resources the stage come to screen the entire ideas. In screening company must avoid two types of errors:
Drop Error It means that when a company drop a good idea, if a company dismiss many drop errors it standards are too conservative. Go Error It occurs when company allow a poor idea to move in development and commercialization.
The screening purpose is to drop poor ideas, as soon it is possible. Most companies require new product ideas to be described on the standard form that can be reviewed by the standard committee. This description states product idea the target market size, product price, development time and cost, manufacturing cost and rate of return. Under a set of certainty the executive committee reviews the idea.
3. Business Analysis
After management develops the product concept and marketing strategy, it can evaluate the proposals business attractiveness. Management needs to prepare sales, costs, and profit projections to determine business objectives. To estimate sales, the company might look at sales history and conduct surveys of market opinion. It can then estimate minimum and maximum sales to assess the range of sale. After preparing the expected cost and profit for the product, including marketing R&D manufacturing accounting, and finance cost.
4. Product Development
If the production concept passes the business test, it moves to R&D or engineering to be developed into a physical production. This stage is also called large jump investment.
The R&D department will develop one or more physical versions of the product concept. It will be hopeful to design a prototype that will satisfy consumers, and can be produced quickly over at budgeted cost. It may take a week, a month, or a year. The prototype must have required functional features, and also convey the intended psychological characteristics.
5. Testing Market
After the satisfaction of the management with functional and physical performance the product is ready to dress up with a brand name and packing and put into market test. The cost of marketing test may be enormous, and take time that may allow competitors to gain advantages. If management is confident about new product, then company may do little or not test marketing. Company usually select three ways for using test marketing
Standard Marketing. A company finds a small number of representative test cities and conduct marketing campaign and uses different ways (consumers & distributors surveys etc) to find the performance of new product. Controlled Marketing. Under this method a research firm manages a panel of stores that will carry new products for fee. The research firm deliver the product to specific stores and controls shelf position. Sales result can be measured through electronic scanner at checkout. Simulated Cost Marketing. In this marketing a research firm shows ads and promotion form a variety of products including new product promotion. Company gives some amount to customers and invites them at selected stores. The researchers observe how many consumers buy new product. Then they ask the reason of buy or not new product. The company keeps in touch with customers through phone and other resources and asks them about the use and qualities of new product.
6. Commercialization
It is the next stage when the company introduce new product into market. Company will face its largest costs. In this stage the company must arrange full scale manufacturing facility. The company may spend in millions on advertising, sales promotion of new product in the first year.
Timing. To launch a new product market entry time is very important. If another company is near to launch the product, company has three choices:
First enter his product Parallel entry of the product Late entry of the product.
Where (Geographic Strategy). The company must decide to launch a new product in a single locality, a region, in a nation or launched it internationally.
To whom (Target Market Prospect). Within the rollout markets, the company must target its initial distribution and promotion to the best prospects. How (Introduce Market Strength). The company should develop an action plan for introduction the new product into the rollout markets.