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Unformatted text preview: ew substitutes may pose large threats to
established products, even if they seem harmless
e.g. Polaroid v. digital photography
How to determine whether a product is in the
same market as existing products, a new entrant,
or a substitute?
• Cross-price elasticity, measures the percentage change in demand for good B that results from
a 1% change in the price of good A; identiﬁes
the substitutes faced by our product.
e.g. Pepsi and tap water?
• Residual demand curve analysis — pricing decisions in a well-deﬁned market will not be
constrained by the possibility that consumers
will switch to sellers outside the market: if
pricing is so constrained, enlarge the market
deﬁnition. R.E. Marks ECL 2-7 • Price correlation — if two sellers are in the same market, they should face the same
demand forces, which will lead to correlated
Not a good method: may be hard to interpret —
if ﬁrms are colluding, their prices will move
• Trade ﬂows — identical product not sold in the same geographical area are not substitutes:
must identify the customer catchment area.
• Competition among ﬁrms in an industry is captured by the ﬁrm-level price elasticity of
demand (see p. 1-18).
• Threatening substitutes measured by the industry-level price elasticity of demand
• Others? Own-price elasticity of demand? R.E. Marks ECL 2-8 2.2.4 Supplier Power and Buyer Power
Suppliers of inputs (labour, materials, energy,
equipment, certiﬁcation, etc.) may be able to
charge prices that extract proﬁts (surplus) from
their customers: supplier power.
No market power if the input supply industry is
perfectly competitive, and prices are set by the
interaction of supply and demand.
But suppliers may have market power:
• if they are concentrated, or
• their customers are locked into continuing relationships with them because of
relationship-speciﬁc investments (see §2.4
Unions have raised wages when its employer
industry is faring well, and may make concessions
when things aren’t good.
A supplier can thus extract much of the target
industry’s proﬁts without destroying the industry
“Power” is not the same as “importance.”
e.g. jet fuel is important, but from a competitive
supply industry R.E. Marks ECL 2-9 Buyer power is analogous: customers may be able
to negotiate lower prices, and hence capture some
of the proﬁts.
Many buyers have some power, but the markets
for output are price competitive, with price close to
MC (see page 1-20.) The willingness of buyers to
shop for best price is a source of internal rivalry in
the industry, not buyer power.
In many industrial markets, ﬁerce internal rivalry
and buyer power can coexist: each transaction is
the result of a bargain between a sales agent and a
purchasing agent, and the contract price for
identical products can vary signiﬁcantly. R.E. Marks 2.2.5 Strategies for Coping with the Five Forces
A ﬁve-forces analysis identiﬁes the threats to
industry proﬁts that all ﬁrms in the industry...
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This note was uploaded on 02/04/2014 for the course TIDB 1010-18 taught by Professor Kellygrany during the Fall '13 term at Tulane.
- Fall '13