Porter Essay

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a) Rivalry between established competitors What are the major factors determining the nature and intensity of competition between established firms? Concentration In general, the fewer the number of firms in an industry, the easier is coordination of pricing behaviour, and the smaller the chance that one firm will initiate aggressive price competition An industry dominated by a single firm displays little competition and the dominant firm can exercise considerable discretion over the prices it charges. Diversity of competitors The ability of the firms in an industry to avoid competition depends not only upon the number of firms but also on their similarities in terms of objectives, costs, strategies. Example: Oil suppliers in OPEC: they were aligned in the 70’s and prices rose up. They were disaligned in the 80’s and prices decreased Product differentiation The more similar the offerings of rival firms, the more willing are customers to move from one supplier to the other. Where products are indistinguishable, the product is a commodity and the sole basis for competition is price Example of commodities: Raw materials : crude oil, gold bullions; Some finished products: DRAM chips, US Treasury bills Excess capacity and exit barriers The propensity of firms in an industry to resort to aggressive price competition depends upon the balance between capacity and output. The presence of unused capacity encourages firms to compete for additional business in order to spread fixed costs over a greater sales volume. Excess capacity may be the result of declining market demand or cyclical market demand or overinvestment. The period during which excess capacity overhangs an industry depends on the ease with which firms and resources can leave the industry. Costs and other impediments to leaving an industry are “barriers to exit”. Barriers to exit may be substantial

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