Module 40.2: Pricing Power and Company Analysis Flashcards
How to high barriers of entry effect pricing power and competition? How can high barriers of entry be determined?
high barrier to entry benefit existing indusry firms.
high barriers of entry can be determined by examining the composition of the industry over time.
Does high barriers to entry mean that firm pricing power is high?
No
What are the five reasons why high industry concentration doesn’t guarantee pricing power?
1) absolute market share may not matter as much as a firm’s market share relative to its competitors.
2) a firm that has 10% market share when no competitior has more than 2% may have a good degree of pricing power
3) if industry products are undifferentiated and commodity like, then consumers will switch to the lowest priced producer.
4) industries with greater product differentiation in regards to features, reliability, and service after the sale will have greater pricing power.
5) if the industry is capital intensive, overcapacity can result in intense price competition.
How does industry over and under capacity impact pricing power?
undercapacity, where demand exceed supply, results in pricing power
overcapacity, where supply exceeds demand, will result in downward pressure on price and lower return on capital
How does market share variability effect pricing power?
more stable market shares likely indicate less intense competition in the industry.
What are switching costs?
expenses a customer faces when switching from one product to another.
What are the four characteristics of the embryonic stage of the business cycle?
1) slow growth
2) high prices
3) large investment required
4) high risk of failure
What are the four characteristics of the growth stage in the business cycle?
1) rapid growth
2) limited competitive pressures
3) falling prices
4) increasing profitability
What are the six characteristics of the shakeout stage in the business cycle?
1) growth has slowed
2) intense competition
3) increasing industry overcapacity
4) declining profitability
5) increased cost cutting
6) increased failures
What are the five characteristics of the mature stage in the business cycle?
1) slow growth
2) consolidation
3) high barriers of entry
4) stable pricing
5) superior firms gain market share
What are the three characteristics of the decline stage in the business cycle?
1) negative growth
2) declining prices
3) consolidation
What are macroeconomic factors that can effect industry growth, profitability, and risk?
interest rates affect financing costs, credit availability, education level of a work force.
What are technology factors that can effect industry growth, profitability, and risk?
photography for example and the introduction of the digital camera
What are demographic factors that can effect industry growth, profitability, and risk?
age, race, location. as the largest segment of the population ages, so does trends in the market.
What are government factors that can effect industry growth, profitability, and risk?
taxes and regulation. as well as purchases (defense producers)
