Lecnotes10 - ECON 696: Managerial Economics and Strategy...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON 696: Managerial Economics and Strategy Lecture Notes 10: Industry Analysis Introduction This chapter provides a practical framework for analyzing a market and determining the long-term prospects for profitability. Once this framework is established, it is applied to three industries: hospital care in Chicago, commercial airframe manufacturing, and Hawaiian coffee, which must have been fun to research. The Five-Forces Analysis Framework The book provides a framework for market analysis that looks at five aspects of a market and the implications of each for long term profitability in a market. Use of this framework presumes an appropriate definition of the market in question. In considering exactly what to include in the market you're analyzing, any geographical borders and the scope of substitutes should be clearly and appropriately determined. 1. Internal rivalry Internal rivalry refers to the level of competition between firms in an industry at both strategic and tactical levels. The aggressiveness of this competition helps determine the level of prices and profits. This competition may be price competition (in which firms compete by offering lower prices than their competitors) or non-price competition (offering higher quality at the same price). Either form of competition can erode profits. The capacity of either type of competition to erode profits is demonstrated quite effectively by the market for air travel in the U.S. Prior to deregulation, regulatory boards set prices well above marginal cost, only to see airlines reduce their profits by competing to provide the highest level of service possible given the high prices. Since deregulation, airlines have competed primarily by trying to offer the lowest prices on any route. However, in situations where firms choose both price and quality levels, drawing a fine line between the two types of competition is a bit artificial. The following factors generally reduce the potential for profitability in an industry. These are also factors that make collusion or a cooperative pricing arrangement more difficult to sustain.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 4

Lecnotes10 - ECON 696: Managerial Economics and Strategy...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online