An industry is a group of firms that offer a product or class of products that are close substitutes for one another. Industries are classified according to number of sellers; degree of product differentiation; presence or absence of entry, mobility, and exit barriers; cost structure; degree of vertical integration; and degree of globalization.
Number of sellers and degree of differentiation:
The starting point for describing an industry is to specify the number of sellers and whether the product is homogeneous or highly differentiated give rise to four industry structure types:
1. Pure monopoly â€“ Only one firm provides a certain product or services in a certain country or area (a local water or cable company). An unregulated monopolist might charge a high price, do little or no advertising and offer minimal service. If partial substitutes are available and there is some danger of competition, the monopolist might invest in more service and technology. A regulated monopolist is required to charge a lower price and provide more service as a matter of public interest.
2. Oligopoly â€“ A small number of (usually) large firms produce products that range from highly differentiated to standard. Pure oligopoly consists of a few companies producing essentially the same commodity (oil, steel). Such companies would find it hard to charge anything more than the going price. If competitors match on price and services, the only way to gain a competitive advantage is through lower costs. Differentiated oligopoly consists of a few companies producing products (autos, cameras) partially differentiated along lines of quality, features, styling, or services. Each competitor may seek leadership in one of these major attributes, attract the customers favoring that attribute, and charge a price premium for that attribute.
3. Monopolistic competition â€“ Many competitors are able to differentiate their offers in whole or in part (restaurants, beauty shops). Competitors focus on market segments where they can meet customer needs in a superior way and command a price premium.
4. Pure competition — Many competitors offer the same product and service (stock market, commodity market). Because there is no basis for differentiation, competitorsâ€™ process will be the same. No competitor will advertise unless advertising can create psychological differentiation (cigarettes, beer) in which case it would be more proper to describe the industry as monopolistically competitive.
An industryâ€™s competitive structure can change over time. For instance, the media industry has continued to consolidate, turning from monopolistic into a differentiated oligopoly.
Media Industry â€“ A case:
For more than a decade, the media business has been steadily consolidating to the point that four media empires can now vertically integrate content with distribution: Rupert Murdochâ€™s $30 billion News corp., Time Warner at $39.9 million, $26.6 billion Viacom and, the smallest, $6.9 billion NBC. Combining the studios that produce programming with cable and broadcasting units that distribute content saves money benefits shareholders. However, consumers are concerned by the effects of dwindling competition. With fewer people deciding on programming, quality and variety could suffer, and less competition may mean higher prices for cable and satellite subscribers. Also, most important, if a few giants control content and distribution, smaller, more innovation programs could be squeezed.