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Also the decrease in price of dram by chip shrinkage

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Unformatted text preview: to a year ago but it will go downward soon. 3-5 Summary Analyzing the DRAM industry using Porter's 5 forces model, the DRAM industry is not attractive. The threats from substitutes and new entrants are quite low but bargaining powers of suppliers and buyers are very high and intensity of rivalry is also high. In addition, the fixed cost for design and fabrication is growing huge in this industry. Also, profits are getting squeezed as DRAM customers are now the consumers rather than corporate customers. Within these circumstances, the number of DRAM providers decreased from 11 to 7 through the 2 1 st century. This increases the power of suppliers due to the limitation of supply. Even though the segment of new applications which adapts DRAM is growing, the computer is and will be the main driver. Considering all the dynamic changes of DRAM industry, DRAM providers should consider new strategies for the profitability. Chapter 4 Framework from Microeconomics: Departure from perfect competition This chapter explains the framework to be applied to the DRAM industry from a microeconomics perspective. The DRAM industry has many similar characteristics with perfect competition market although the perfect competition from microeconomics is unrealistic. But, strategic points for profitability can be taken by violations of assumptions of perfect competition 13. Therefore this chapter will describe the basic concepts of microeconomics (demand, supply, equilibrium, and perfect competition) and will point out some strategic points and offer a framework. This framework is generated from A note on Microeconomics for Strategists, Kenneth S. Corts and Jan W. Rivkin, 1999. 4-1 Basic concepts of microeconomics 4-1-1 Demand Demand is the desire to get any services and products for utility or to attain happiness. From the business perspective, demand is derived from buyers who want to purchase services or products to make a profit by using inputs. Also, willingness to pay can be defined as the price which is indifferent whether buyers do purchase or don't purchase the service or products. This willingness to pay is decided by buyer's tastes, financial capability, availability of substitutes, Kenneth S. Corts and Jan W. Rivkin, A note on Microeconomics for Strategists, the president and Fellow of Harvard College, 1999, page 15 41 13 and complementary goods. Following the law of diminishing marginal utility, the willingness to pay is decreased by purchasing more units. Therefore the slope of demand curve is normally negative. Aggregating these individual buyers' curves make a market demand curve assume that all products provided are identical. Another important concept is elasticity of demand curve. The price elasticity of demand curve is defined as the responsiveness of the quantity demanded of a good or service to a change in its price 4 . The demand of monopolistic products is inelastic to the price change, but the demand of commodity products is very elastic to the price change. Also, the price elasticity of demand curve for short run is usually steep and for long run is quite flat. From the strategic perspective, this elasticity is very important as related to availability of substitutes, and complementary goods. For example, commoditized mature product manufacturers such as DRAM providers have little power because of elastic demand for price from identical substitutes from other providers. Contrary to this, monopolistic product manufacturers such as Intel have a lot of power affecting the price of complementary products in the PC platform. Price Short Run Price Monopolistic Market Long \ % Run Commodity Market Units Figure 4-1 Elasticity in different time frame and industry 14 http://en.wikipedia.org/wiki/Price-elasticity-ofdemand 42 Units 4-1-2 Supply Supply curve is defined as the amount of goods a supplier will provide at each price'. A supply curve can provide important points on how individual firms increase their profits. For short run, individual firms focus on production level based on its costs, especially marginal costs. Marginal costs composed of cash costs and opportunity costs affect short run supply. Short run supply curve is the same with positive slope marginal cost curve. In the long run, suppliers should consider average costs including fixed costs and marginal costs as well and firms' exit decisions can be made based on cost analysis. If the market price is higher than a firm's efficient point that marginal costs meet average costs, a firm should increase CAPEX. If the market price is lower than a firm's marginal cost, a firm should shut down theoretically. Price Marginal Cost Increasing CAPEX Average Cost No CAPEX Shut down Units Figure 4-2 Market EXIT and Investing by costs and prices Kenneth S. Corts and Jan W. Rivkin, A note on Microeconomics for Strategists, the president and Fellow of Harvard College, 1999, page 15 43 15 The main factors influencing the supply curve are the costs of inputs and technology. A change of costs makes supply curve move and investing plan change...
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