Chapter 3 - Analyzing Global Industries

Question 1

Defining the market

Answer 1

1. Deciding which goods to include
2. Identifying the firms competing in the market
3. Indicating the geographical area where those firms are competing

Question 2

Different market structures

Answer 2

• Perfect competition
  o Many firms supply identical products – no barriers to entry
  o Firms cannot set own prices – determined by market
  o Products are seen as identical by consumers
• Monopoly
  o One firm, high barriers to entry and unique products (E.g. utilities)
  o Production is on a very large scale
• Monopolistic competition
  o Large number of firms, no barriers to entry, small product differentiation
  o Large number of outlets, easy of entry (E.g. Convenience stores)
• Oligopoly
  o Few number of firms, high barriers to entry, differentiated products

Question 3

Market power and concentration

Answer 3

• The distribution of power among firms in an industry is assessed by the level of market concentration which is measured by the market share
• Market concentration determines competitive pressures – high concentration indicates low competition – firms can determine pricing
• Monopoly – highest level of concentration – one firm holds 100% of market
• Perfect competition – power is equally distributed, market concentration is low
• Oligopoly – a few firms dominate market, concentration is high
• Measuring market concentration:
  o Concentration ratio: Taking share of largest firm in industry sales/output
  o HHI Index: Summing squares of individual market shares of all firm in market

Question 4

Porter’s 5 forces

Answer 4

• Industry rivalry
  o Varies in form and intensity between industries and over time
  o Competition – price, advertising, promotion, distribution, new products
  o Dependent on: Number of firms, size of firms, market growth rate, product differentiation
• New entrants
  o Profitability of new entrants depends on barriers to entry – cost barriers, legal barriers
  o Economies of scale
• Substitutes
  o Goods produced in different industry but delivered in a different way
  o Influenced by cost and ease with which customer can switch to the substitute product
• Bargaining power of customers
  o Where many firms in the industry have a small number of large customers – buyers can have more power as a loss in a single client can impact profits
  o When customers only have a few suppliers – less bargaining power
  o Depends on product differentiation and ease of switching
• Bargaining power of suppliers
  o When an industry comprises of a small number of firms facing a large number of customers – the industry is more powerful
  o Suppliers can get away with price increases, reduction in quality and worsening of terms and conditions of sale
• Complementary products
  o Products used together
  o Supply/demand is determined by how well the products work together