If the market price is lower than a firms marginal

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Unformatted text preview: . Disruptive technology increases the efficiency of a firm's operation. Price elasticity of supply is a very important aspect. The supply curve is usually inelastic in the capacity constraints industry or capital intensive industry. Also, supply in the long run is more elastic than in the short run. From the strategic perspective, the market price and the quantities supplied can be forecasted by concept of elasticity and a firm can cope with the dynamic business situations. 4-1-3 Market Equilibrium The market equilibrium is the point where demand curve and supply curve meet and market price is decided at this point as well. In the real market, demand and supply, and price do not stay at an exact point of equilibrium due to adjusting time but they move toward the equilibrium. With this equilibrium price, a firm can assess the investment or shout down decisions by comparing with its cost structure. The market equilibrium is defined with three major assumptions below. 1. Identical Products for aggregating the individual demand and supply curves 2. Many price-taking participants 3. Full information opening to everybody For a firm's business strategy, market adjustment can provide intuition for decisions. The status of market demand and supply can be detected by market equilibrium price and quantity. 44 For example, increases in both price and quantity mean industry growth. In addition, price and quantity movement can be forecasted because demand and supply in the long run are elastic. In other words, demand and supply can be easily adjustable in the long run. 4-1-4 Perfect Competition The model of perfect competition describe that a firm cannot pursue a sustainable profit with the three more assumptions listed below added to those of market equilibrium. 1. Identical sellers: the same technology and inputs are offered to the suppliers 2. Free entry 3. Free exit From these assumptions, time adjustment is not needed for market equilibrium. If there are any little chances to make a profit, entrants rush in and the price is back to the equilibrium. In other words, firms can earn profits which are exactly the same as the cost of capital. In other words, the competitive advantages from cost leadership and differentiation cannot be achieved in the perfect competition. 4-2 Framework: Departure from perfect competition A few perfect competition markets do exist in real world industries. But, departures from perfect competition imply strategic points for individual firms pursuing profitability. The strategic framework for industry can be drawn by violating each assumption of perfect competition. " Violation of Identical Products Assumption Buyers can easily change the products depending on prices because all suppliers provide the same products in perfect competition. To violate this assumption, supplier can achieve more profitability when they differentiate their product. To differentiate the product, the firm should have one or more attributes of a product, match their position to customer needs and set an adequate cost which is lower than willingness to pay'6 . Also, they use brand image and logistics. " Violation of Many Pricing-Taking Participants Assumption Suppliers and buyers in perfect competition market just follow the market price decided by demand and supply. If there are one or more large suppliers or buyers, this assumption can be violated. In the real world, price-taking assumptions usually happen in the commodity market. Using cost leadership or market control power, a firm can Krishna G. Palepu, Paul M. Healy, and Victor L.Bernard, Business ANALYSIS & Vlauation: Using Financial Statements, South-Western, Thomson, 2004, page 2-8 16 46 have price controlling power. Differentiation or cost leadership strategies can be a way to be pricing-makers. * Violation of Full Information Assumption This assumption is crucial for market participation. In other words, violation of this assumption can build a barrier to new entrants. Buyers usually have more information for incumbent suppliers and they don't want to take the risk of having a small vendor. Also, incumbents who have a large market share can have more information than a small supplier because they can estimate market information based on their internal data. Therefore new entrants and small suppliers should spend more money on gathering and analyzing market information. An asymmetry in market information can be a big barrier to new entrants. * Violation of Identical Sellers Assumption Identical sellers can access the same technology and inputs at the same time. Increasing buying power, cost leadership in process and differentiation are strategies to violate this assumption. For example, Intel which has PC platform leadership with microprocessors, has its own high technology violating this assumption. Contrary to this, many commodity suppliers do not have its identical technology. N Violation of Free Entry and Exit Profit can be eroded under perfect competition since fir...
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