Essay about Barriers to Entry and Bargaining Power
2. What are the critical drivers of industry profitability?
Rivalry Among Existing Firms. The greater the degree of competition among firms in an industry, the lower average profitability is likely to be. The factors that influence existing firm rivalry are industry growth rate, concentration and balance of competitors, degree of differentiation and switching costs, scale/learning economies and the ratio of fixed to variable costs, and excess capacity and exit barriers.
Threat of New Entrants. The threat of new entry can force firms to set prices to keep industry profits low. The threat of new entry can be mitigated by economies of scale, first mover advantages to incumbents, greater …show more content…
Barriers to entry allow a firm to earn profits while at the same time preventing other firms from entering the market. The primary sources of barriers to entry include economies of scale, absolute costs advantages, product differentiation advantages, and government restrictions on entry of competitors. Firms can create these barriers through a variety of means.
1. A firm can engineer and design its products, processes, and services to create economies of scale. Because of economies of scale, larger plants can produce goods at a lower cost that smaller plants. Hence, a firm considering entering the existing firm’s market must be able to take advantage of the same scale economies or be forced to charge a higher price for its products and services.
2. Cost leaders have absolute cost advantages over rivals. Through the development of superior production techniques, investment in research and development, accumulation of greater operating experience or special access to raw materials, or exclusive contracts with distributors or suppliers, cost leaders operate at a lower cost than any potential new entrants to the market.
1. A firm can