Free «Market Structure» Essay Sample

The industry within which an organization operates affects the firm’s decisions significantly as directed by the market structure within such an industry. There are four prominent market structures namely perfect competition, monopoly, monopolistic competition and oligopoly. The market structure determines the manner in which a firm makes critical operational, tactical and productive decision; central to this paper is the effects of the market structure on the competitive strategies chosen by a particular firm. For the purpose of exemplifying the competitive strategies consistent with a specific market structure, this paper chooses to focus on the banking industry. In particular, the paper chose to focus on Equity Bank Ltd (Kenya) for the purposes of this analysis (Wright et al., 2007).

The banking industry was chosen due to the critical role it plays in the modern macroeconomic stability of an economy; the industry has become under sharp scrutiny following major economic meltdowns in which the banking sector has had a role. In specific, the choice of Equity Bank was due to its unique approach to banking in the developing country. The bank has been able to combine unique microfinance aspects into mainstream banking. In addition to its credibility, its CEO is the world entrepreneur of the year 2012; this places the bank in a central role in improving banking in the developing world, particularly Africa (Wright et al., 2007).

Equity Bank and the banking industry in Kenya operate in a monopolistic competitive market structure; the choice of this market structure arose from the unique attributes that monopolistic competitive firms have and the intrigues they offer in analysis. Unlike monopoly (whose barriers to entry and one seller offers a lot of market power and pricing autonomy) or perfect competition (whose buyers, many sellers, free entry and exit, no transportation costs, perfect information among others) offers useful assumptions that allows easy strategic analysis; monopolistic competition combines the two extreme market structures. Its unique position, pegged on individual firm ability in creating power through its competitive strategy makes a focus this market structure more appropriate in competitive strategy analysis (Wright et al., 2007).

The major form of competitive strategy in competitive markets is product differentiation, it leads to the downward sloping demand curve (a show of market power) and allows raising of prices; Kenya’s banking industry offers highly differentiated products and services. Equity Bank has been on a product differentiation mission in which it has taken micro financing role from the traditional micro credit non-banking financial institutions and modified its services to a new concept. The bank targets lower and middle (non-corporate) market segment however, its differentiation has focused on microfinance loans to small businesses. To maintain its growth in the long-run, Equity Bank (which is Kenya’s largest bank in number of account holders) must differentiate its products along other services and products such as interfacing them with mobile service providers’ money transfers; this will ensure product/service appeal hence a will lock-in to the large number of account holders. It must also differentiate in terms of location through increased presence since over 30% of Kenyan population is not banked (Jahn, 2007).

In addition to product differentiation, Equity bank must invest in product improvement. This is because firms in monopolistic competitive markets earn normal profits in the long run. This will help the bank regain its economic profits that is eroded by entry into this lucrative microfinance section within mainstream banks. However, the improvement in products and services must be constant and ahead of the competitors due to limitability. The bank should also use property rights to protect innovative services that meet the legal criteria; this is yet to be used by any Kenyan bank. The last competitive strategy for Equity Bank’s long run profits regards choice of appropriate pricing strategies of its services and products since the eminent long-run concentration in this segment may lead to pricing advantages. This includes well determination of demand elasticities of its products. For instance, bank may employ cost-plus, multi-product pricing along its different services/ products or other pricing approaches that ensure its account holders remain and become active (Jahn, 2007).

Lastly, this paper note that majority of the competitive strategies proposed above are critical to the bank’s long-run profits but, there efficacy depends on consistency and dedication. The banking sector in Kenya is highly competitive with both local and foreign banks. For instance, the large conversion of microfinance institutions into banks KWFT and Faulu Kenya threatens Equity bank’s market. Thus, Equity bank may require focusing on product differentiation through huge investment in product development; this is because the products are highly imitable and despite the high number of account holders, citizens often hold accounts in more than one bank. Thus, to reap long run profits Equity bank must invest more in research and development. This study recommends both creation and capturing value through constant improvement of product/service, cooperative behavior and competitive behavior (pricing). Lastly, the bank must focus on its objective and demand functions when making decisons (Porter, 1980).


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