Market Structure in Marketing has Multiple Dimensions and Levels of Substitutability

Like 4Ps of operation management (People, process, policy, and plant), the 4Ps of the marketing mix (initially conceived by Neil H. Borden and organized by E J McCarthy in 1960s) is essential for managers to understand. However, they are vital for marketing managers.

Three more Ps have been added during last fifty years, yet a product, price, promotion, and place are helpful to understand marketing market structure. We can raise many questions with these four Ps like:

  • Product – Is it substitutable? What are levels of substitutability?
  • Price - How consumers react to the substitutes with the change in price? How the market reacts to cross-elasticity of demand?
  • Promotion – How can advertisements be arranged to cater different levels and dimensions of substitutability?
  • Place – Does place matters for your product? What is the impact of internet connectivity and the globalized world on your market?

In this brief article, we shall discuss importance and levels of substitutability and competitiveness in marketing.

Substitutability and Competitiveness

What is a market for marketing?

It is tough to answer because a product can have various dimensions and levels of substitutability. Fraser and Bradford point out that a product can be competitive when a consumer knows that he can substitute currently used a product with another product for the same purpose. When a product does not have a substitute, it is a monopoly.

A market in marketing context may be viewed as PRODUCTS having common purposes.

Prima facie, a difference of market in microeconomics and marketing is not very clear. However, in marketing the more focus is placed on multiple dimensions and levels of substitutability. For example, you are launching a new kid’s milk. It shall have a set of competitors in power milk (one kind of market) and another with fresh milk (another kind of market). Your new product still has an untapped market for new customers. In each market, the promotions shall highlight important points for that particular market.

Your marketing strategies can impact the sale of the substitute products. You can measure this impact with the help of cross elasticity.

Substitutability and market impact of marketing strategies relate to each other. A product which is similar in purpose may be disturbed with marketing strategies of a firm. It may not be a good statement in case of brand loyalty. However, even a brand name can’t hold customer’s loyalty with a massive change in its prices or the prices of the competitors.

Gaps in Substitutability

A product may look like a substitute at one time but not at another time. It hampers efforts to measure cross elasticity correctly. Triffin (the 1940s) termed such a situation as gaps in the chain of substitutability.

Even if we have all information of variables to measure cross elasticity, still there is no definite way to determine the validity of such information. Furthermore, the relationship between different commodities can neither be fixed nor permanent but frequently changes in products, the arrival of new products and consumer behavior (Needham).

From management perspectives, consumers' behavior can shift with real or perceived changes in the product. Another shift may take place in case of differences in actual or perceived product substitutability.

Marketing Structure and Managerial Economics

The concept of marketing market-structure has not only influenced microeconomics but also provided essential tools for managers. It focuses on fundamentals (mainly environment) of microeconomics marketing structure which result in different structures.

Microeconomics focuses on the performance of a market besides connecting social problems which require a high level of simplicity. While marketing mainly focuses on consumers’ behaviors to help in developing marketing strategies.

As marketing focuses on details, so it highlights certain areas of market structure which get the least attention in the broad concept of microeconomics. Such variables are simplified as given preferences and discussed in the frame of ‘as if’. This framework and assumptions are essential to consider complexities of managerial economics. However, marketing not only addresses underlying determinants of a structure but also dynamics of consumer preferences.

Similarly, we use a phrase in different models, “If other things remain the same.” But this is just another economic fiction. It is also tough to discuss every specification of economics. Keeping in view these limits, the analysis of marketing market structure is helpful to understand initial conditions and implications of microeconomic market structure.

Rephrasing Gorver and Rao (1988), there is no real marketing market structure. But same can be extended to microeconomics market structure(s). Perfect competitive and complete monopolies are other fictions which don’t exist in the real world, but we have to devise models to understand their implications. Same is correct with marketing market structure.

Market Structure in Microeconomics
How to Define a Market?

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