Module 10.3 Competitive Forces Lecture

Determinants of Industry Competitiveness

• Existing Competitors

  • The presence of existing firms plays a critical role in the competitiveness of an industry.

  • Even firms not currently in the market present potential competitive threats that can influence pricing and market dynamics.

  • Example: If Uber raised its prices significantly, rival services could quickly enter the market, preventing monopolistic price control.

• Market Share and Monopoly Power

  • A company having a large market share does not necessarily equate to exercising monopoly power.

  • Firms can still face competition and thus choose not to exploit their market position by inflating prices.

• Competition from Substitutes

  • Companies compete not just with direct competitors but also with substitutes available in the market.

  • E.g., Amazon competes with both other online retailers and traditional brick-and-mortar stores like Walmart.

  • In a different domain, a Ford car competes with a Chevy car not only at a dealership level but also against used cars in the market.

• Supplier Market Power

  • Firms must manage relationships with suppliers who provide the inputs necessary for their products.

  • If suppliers have significant market power, they can raise costs, thereby reducing profits for the firms creating the final products.

  • Example: Transitioning to a new accounting software could involve high switching costs and complications.

• Switching Costs

  • High switching costs can deter firms from changing suppliers, impacting competitive dynamics within the industry.

  • It often results in a less competitive landscape, as firms remain locked into certain suppliers despite possibly better alternatives.

• Political and Economic Considerations

  • "Pro-business" policies may sometimes protect specific businesses from fair competition; while beneficial for the protected business, this can harm consumer interests and market efficiency.

  • Example: Why is a burger at a diner in a remote location more expensive than at a popular area? It's due to limited competition.

• Long-term Firm Viability

  • Successful firms may lose their edge due to changes in competition or new product introductions that are easy to replicate.

  • An examination of these dynamics requires a more in-depth discussion than basic theories covered in an introductory course.

• Profit Maximization

  • The profit maximization process involves making decisions about inputs such as capital and labor and considering how to substitute between them effectively.

  • Important considerations include marketing strategies, product differentiation, and pricing strategies (e.g., bundling, price discrimination).

• Complex Strategies

  • Companies must adopt complex strategies to remain competitive, which includes advertising, product bundling, and targeted pricing.

  • While these intricate methods may not be the primary focus of introductory discussions, they are essential for understanding firm behavior in a competitive environment.