Classification Of Industries

CLASSIFICATION OF INDUSTRIES Industries consist of all the firms that produce goods and services. In other words, industry refers to the part of business that creates form utility by converting raw materials into finished products. Defining 'industry' can be tricky. An industry could be described as a group of firms competing against one another - like the tire industry, which includes all the tire manufacturing companies such as MRF, Dunlop, Ceat, etc. Similarly, companies like Hindustan Unilever, Godrej, Wipro, Nirma and more make up the soap industry. However, in a monopoly there is only one firm. Also, there may not be competition between firms in a nationalized industry. It's important to note that many companies make and sell products in multiple industries. For example, Hindustan Lever sells soaps, detergents, talcum powder, toothpaste, agro-chemicals, edible oils, cattle feed, and more. There are various ways to categorize industries, such as by the end use of the output, ownership type, size, and more. Classification by Nature of Activity One important classification of industries is by the nature of the activity, as described below: Extractive Industries: These industries extract goods from natural sources like farming, lumbering, fishing, mining, and oil drilling. Their outputs are mostly commodities. Genetic Industries: These relate to genetics or breeding, like animal, bird, and plant breeding. Biotechnology has emerged as a very dynamic segment within this industry. Manufacturing Industries: Manufacturing transforms raw materials into intermediate or finished products. Manufacturing can be divided into basic industries (like iron and steel), capital goods (like machines), intermediate goods (like tires and tubes), and consumer goods (like refrigerators and soap). Construction Industries: Construction is a booming industry in developing countries like India. It involves building roads, railways, bridges, ports, dams, canals, buildings, and more. Service Industries: As mentioned earlier, the service sector is very dynamic in many economies. Services include banking, insurance, transportation, professional services like doctors, lawyers, and consultants, advertising, market research, financial services, and more. IT Industries: The IT industry is a sunrise industry that facilitates and propels many other industries' growth. It has several segments within the service sector. Classification Structure by Competitive Looking at competitive structure, industries take the following forms: Monopoly: A monopoly is where there is only one firm in the industry, so no competition exists. Indian Railways is an example. Since monopolies have no competition, consumers can be exploited. Effective government control of private monopolies is necessary, like India's Monopolies and Restrictive Trade Practices (MRTP) Act. The MRTP Act has now been replaced by the Competition Act. In some sectors, economies of scale may justify a monopoly because fragmentation would increase costs. Public sector monopolies were common, but that is changing. A situation with a single buyer is called Monopsony (Monopoly refers to a single seller). A single seller and single buyer are bilateral monopoly. Duopoly: A duopoly has just two firms or sellers, like the caprolactam industry in India. Oligopoly: An oligopoly is when there are only a few firms or producers/sellers in an industry. If a few firms account for 80-85% of the market, even if many firms split the rest, it's an oligopoly. There are two oligopoly types - perfect oligopoly with identical products, and imperfect oligopoly when products differ somewhat. Many high-tech industries are oligopolistic. In India, cars and computer hardware were oligopolies but are becoming more competitive. Oligopolies often see firms colluding on pricing or price leadership where the leading firm initiates price changes. Output restrictions, market sharing, and collusive pricing are negatives of oligopoly. Firms may form secret cartels since cartels are illegal. Monopolistic Competition: In monopolistic competition, many firms sell products that are similar but not perfect substitutes. Product differentiation is essential. The more a firm differentiates from competitors, the greater its pricing freedom and advantage. Firms use promotional strategies to differentiate products and market them, incurring selling costs. For example, the textile industry has monopolistic competition. Although the sugar industry has many firms, there is little product differentiation. The soap industry appears monopolistic by number of brands but is more of an oligopoly by number of major firms controlling most market share. The advantage of monopolistic competition is consumer choice and the benefits of competition like quality, service, and costs. But product differentiation is often excessive and selling costs are a social cost. Perfect Competition: Perfect competition means many firms selling identical products, each with an insignificant market share and unable to influence market prices. The requirements for perfect competition are: many firms, identical products, free entry and exit of firms, perfect knowledge among buyers and sellers, complete mobility of production factors between industries, and no transport costs (which distort prices). If the first three conditions exist, it is Pure Competition. Firms earn only normal profits - just enough to stay in business. Excess profits attract new firms. Firms unable to earn normal profits will exit. While perfect competition is considered ideal because firms earn normal profits and consumers aren't exploited, it is rare for all the conditions to be met. Although many standardized products are made by numerous firms, perfect knowledge of market conditions may not exist. The downside of perfect competition is lack of variety and consumer choice.