Wednesday, April 6, 2011

Defining Market Boundaries

In the earlier blog, we mentioned that definition of a market helps identify which buyers and sellers should be included in a given market. To get more clarity on whom to be included or excluded it is important to define the extent of a market - i.e. its boundaries, both geographically and in the range of products to be included.

Extent of a market is the boundaries of a market, both geographical and in terms of range of products produced and sold within it.

If the extent of a market is not defined, it leaves many questions open; lets clarify this with the example of a petrol. When I say a market for petrol the questions that would come out include - which geography are we referring to - Is it Bangalore or Delhi or Mumbai? What is the octane number of the petrol? Is the petrol leaded or unleaded? Should diesel be included as well? Etc.

The market definition is important for two reasons:

  • A company must understand its actual and potential competition for its current or future products. A thorough understanding of the product boundaries and geographical boundaries of its market to set the price, determine the advertisement budgets and make capital investment decisions etc.
  • At a macro level, an understanding of the market helps make effective public policy decisions. The government could look at the implications of a possible merger or acquisition of two companies either in the same domain or other, on the market situation on the prices, competition and approve or disapprove it

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