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lect02 - R.E Marks ECL 2-1 R.E Marks ECL 2-2 2.1 Porters...

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R.E. Marks ECL 2-1 2. Industry Analysis Porter’s Five Forces provides a convenient framework for exploring the economic factors that affect the profits and prices of an industry. Porter’s analysis systematically and comprehensively applies economic tools to analyse an industry in depth: How can the firm make profits? Opportunities for success and threats to success? A basis for generating strategic choices. Applies to service sectors as well as industrial. Limitations of the framework: it does not address the size of demand or its growth it focusses on the entire industry, not on a particular firm it does not explicitly account for the role of government it is qualitative R.E. Marks ECL 2-2 2.1 Porter’s Five Forces Internal Industry Rivalry Supplier Power Buyer Power Substitute Products Entry
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R.E. Marks ECL 2-3 2.2 The Economics of the Five Forces 2.2.1 Internal Industry Rivalry This may occur via price competition, or via non- price competition. (See Lectures 3–5.) Six factors favour price competition: market structure: many sellers no product differentiation: homogeneous the nature of the sales process: secretive, large, and lumpy capacity utilisation: excess consumers (buyers) — motivated, and capable: low switching costs Even without apparent competitors, an incumbent firm may set competitive prices. See contestable markets in Lecture 6. A history of coexistence with respect to price rivalry (because of price leadership and signalling — see Lecture 5), versus repeated price wars. R.E. Marks ECL 2-4 2.2.2 Entry Firms attracted by (economic) profits. Remember that Total Cost includes a normal return to capital, so positive accounting profits may not be sufficient incentive to entry. Entry of new firms erodes profits by: reductions in sales and shares, and reductions in market concentration, which greater internal (industry) rivalry, and often reducing cost-price margins. (Remember the mark-up formula on page 1-20.) Barriers to entry (see Lecture 6) may be structural or regulatory: economies of scale and scope (see §2.5 below) limited access to essential resources or channels of distribution patents need to establish brand identity, or overcome incumbents’ brand identities other cost advantages, such as an incumbent’s learning economies (see § 2.5.5 below) predatory pricing (selling below min AC ) high capital costs licencing costs
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R.E. Marks ECL 2-5 Entry barrier may also be strategic: incumbents maintain excess capacity or threaten to slash prices. Exit barriers also serve as entry barriers, given the costs of exiting for risk-averse entrants who eventually fail. A high rate of entry in the past may be continued. Technological change may reduce entry barriers greater competition.
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