Lesson 4 - Market, Competition, and Market Structure

In order to make a profit, an entrepreneur has to understand the market served by one’s product or service, which means one has to understand the factors that affect demand and supply. The factors of demand include incomes, tastes, demographic size, preferences, prices of substitute or complementary products, and expectations for the future. On the supply side, an entrepreneur has to know the conditions that pertain to production, which will affect one’s intention and capacity to produce. These include own price, production costs, technology, future expectation, number of suppliers, government policies and regulations, and price of joint products. Also, the entrepreneur has to know the quantity of demand and supply at the different price levels to determine how much one should produce at what price.

Market allocates scarce resources through competition and price. In a perfect market with numerous well informed buyers and sellers who can freely compete and transact, the market is said to be in equilibrium when supply is equal to the demand. However, in the real world, the market is not perfect. It may be in a state of monopoly, oligopoly, or monopolistic competition. In each case, the market is occupied by one, a few, or many firms.

To challenge the market leaders, innovative entrepreneurs may come up with a new product or service that appeals to a completely new group of customers. This is a risky act that may end up in total failure or sudden glory, depending on whether a few early adopters, whose needs have not been addressed by the current market, can be captured. Usually this is very difficult to achieve because the incumbents may use existing advantages to put up entry barriers against the challengers to stop them from stealing away any converts. If the adoption of the early adopters spreads successfully, subsequent massive adoption by mainstream customers may ultimately shift the market. For instance, Apple’s introduction of IPhone in 2008 totally changed the landscape of the mobile phone market, leading to the dethrone of Nokia from her reign. In transportation, Uber has taken away market share from taxis in those cities that she is allowed to operate.

These barriers will become obstacles for entrepreneurs to overcome. For example, the Wintel platform (Microsoft Windows and Intel) was once considered a monopoly of the desktop computer interface. Any new player entering the PC market has to use the Wintel’s software and hardware as the building blocks for one’s offering. In short, the two companies set the standard through their relationship as complementary products. Fortunately, time has changed. The desktop computer has surrendered her throne to the internet which is not controlled by any single vendor or platform. Right now, we can connect to the internet using our desktop computer, tablet, smart phone, or other wearable devices.

Entry barriers may stifle innovation. Without fair competition, the product and service offerings may deteriorate over time as there is no incentive to improve due to the absence of alternatives. For example, the TVB’s dominance of the local TV market has been said to cause a decline in production quality of her programmes.

Major points to recap

a. In order to make a profit, an entrepreneur has to understand the market served by one’s product or service, which means one has to understand the factors that affect demand and supply.
b. Market allocates scarce resources through competition and price. In a perfect market, numerous well informed sellers and buyers can freely compete and transact.
c. In the real world, the market is not perfect. It may be in a state of monopoly, oligopoly, or monopolistic competition. In each case, the market is occupied by one, a few, or many firms.
d. Entrepreneurs challenge market incumbents by coming up with innovative products or services that address the needs of a group of neglected customers.
e. The challenge may fail as there are entry barriers erected by the existing market leaders.

Questions
a. Can you give an example of complementary products found in the smart phone market?
b. What will happen to one of the complementary products when the supply of the other one is in shortage?