•Bargaining power is the ability to influence the setting of prices. •The more concentrated and controlled the supply, the more power it wields against the market. •Monopolistics or quasi-monopolistic suppliers will use their power to extract better terms (higher profit margins or ) at the expense of the market. •In a truly competitive market, no one supplier can set the prices. Aggregation of Supply
•Suppliers can group to wield more bargaining power.
•This aggregation can take different shapes.
•Cartels try to influence prices to their own advantage. In most developed countries cartels are illegal. •Sometimes suppliers have secret collusion agreements that are difficult to prosecute. •In most developed countries, a watchdog is responsible to protect well functioning markets from excessive supply aggregation. •Cartels, like monopolists, will prefer higher prices (i.e. higher profit margins) at lower quantity, thus choosing a point on the supply curve that will not supply for all the buyers that would buy at the lower free market price. Examples
Industries facing powerful suppliers:
•The PC making industry faces the almost monopolistic power of operating system supplier. Microsoft has abused its power a number of times and had to be reined in by competition watchdogs all over the world. •Industries using diamonds, such as jewelry and electronics, face the huge power of DeBeers, that takes advantage of the supply concentration to achive dominant market share Industries facing weak suppliers:
•Food processors can buy agricultural produce from many, weak small and medium farmers. •Retail stores can fill their shelves with many competing products from different producers. •Airlines face a duopoly of two equally powerful competitors (like Airbus and Boeing in the aviation industry). Although they are both big and powerful, the threat of substitution is enough to keep their power at bay. BARGAINING POWER OF BUYER
•Bargaining power is the ability to influence the setting of prices. •Monopsonistic or quasi-monopsonistic buyers will use their power to extract better terms (higher profit margins or ) at the expense of the market. •In a truly competitive market, no one buyer can set the prices. Instead they are set by supply and demand. •Prices are set by supply and demand and the market reaches the Pareto-optimal point where the highest possible number of buyers are satisfied at a price that still allow for the supplier to be profitable. Supply and Demand
•The supply curve is the relationship between price and supplied quantity. Normally, the higher the price, the higher the supplied quantity as more supplier will be interested to produce and sell at a higher price. •The demand curve is the relationship between price and demanded quantity. Normally, the lower the price, the higher the demanded quantity as buyers will be willing to buy more at a lower price. •In a truly competitive market, supply and demand meet at the price where the supplied quantity equals the demanded quantity. •If supplied quantity is higher, price will fall.
•If demanded quantity is higher, price will raise.
Industries facing powerful buyers:
•Defense contractors have a limited set of politically motivated buyers (governments). •Sub contractors to car makers have a limited set of potential clients, each commanding a large share of their market. Industries facing weak buyers:
•Retailers face individual consumers with little or no power at all. BARRIERS TO ENTRY
* Barriers to entry are obstacles on the way of potential new entrant to enter the market and compete with the incumbents. * The difficulties of entering a market can shelter the incumbents against new entrants. * Incumbents' profits are potentially higher than in a truly competitive market, at the expenses of their suppliers and buyers. * The higher the barriers to entry, the more power in the hand of the...