1. Barriers to Entry
a. If there are low barriers to entry in an industry, then competitors can easily enter the industry. Such an industry is highly competitive, and the suppliers have very little pricing power.
b. If there are high entry barriers, the existing companies enjoy economic profits longer and have greater pricing power.
c. However, there may be situations where the barriers and the pricing power are not always related, for example, the auto manufacturing industry has high entry barriers but low pricing power.
d. The barrier to entry in an industry is not equal to the barrier to success and vice-a-versa. This means that the mere entry into the industry is not a guarantee of
e. The barrier to entry is not static over time.
2. Industry Concentration
a. Industry concentration means the number of larger companies in the industry controlling the market share of the industry.
b. The higher the degree of concentration, the lower is the price competition. It becomes easier for the firms in the concentrated markets to coordinate strategies but the larger firms have more to lose from the price war.
c. The more fragmented the industry, the higher is the price competition. In such industries, the firms are unable to monitor their competitor’s actions, thus coordination becomes difficult. In a fragmented industry, the firms act individualistically, rather than competitively.
d. The following matrix shows the example of industry concentrations:
3. Industry Capacity
a. If the industry has limited capacity, the demand is generally greater than the supply. In such situations, there is more pricing power.
b. If, however, there is excess capacity, the supply is greater than the demand. In such situations, there is weaker pricing power.
c. If new physical capacity is created, it takes longer for the capacity to come online, and the markets remain tight for some time. However, if overcapacity is reached, it will exist for an extended period.
d. If capacity is financial/ human, the companies can ramp up much quicker.
4. Market Share Stability
a. Stable market shares indicate less competitive industries.
b. The unstable market shares, on the other hand, are indicative of highly competitive industries with little pricing power.
c. The market shares are affected by the barriers to entry, new products, and product differentiation.