Chapter 12 suggested answers
It has been said that Porter’s five-forces analysis turns antitrust law on its head. What do you think this means?
Antitrust laws are intended to protect, promote competition and to push industry profits towards competitive floor in order to resist market dominance. Porter’s five forces model reflects that an industry has absolute market power if threat of entrants and substitutes are low along with weak bargaining power among suppliers and buyers, and if industry is not competitive.
Comment on the following: All of wisdom contained in the five-forces framework is reflected in the economic identity: Profit = (Price – Average Cost) x Quantity
[π = (P-AC) x Q]
Porters all five competitive forces affect the variables in equation: (1) Rivals: If competition within industry is high, profit π will be lower due to lower P . (2) Entry: If barriers to market entry are weak, new entrants in industry will boost competition, reducing P in order to avert market entry. Or new competitors will increase supply (Q), driving P & π down. In addition to this, firms operating at full capacity will be left with only choice of raising P to maximize π. (3) Substitutes: Availability of substitute goods can limit price level P, so as to deter buyers from switching to substitute product or service. (4) Suppliers: High bargaining power of suppliers can cause firm’s AC to increase, as a result driving Q down. (5) Buyers: Buyer’s high market power will force P to reduce.
How does the magnitude of scale economies affect the intensity of each of the five forces?
(1) Rivals: Scale economies would take advantage of market power by cooperating to discourage competition forcing prices to rise. (2) Entry: Scale Economies concentrate market and prevent rivals from entering the market. Startup firms incapable of achieving MES can make market entry only at cost disadvantage. Firms with higher economies of scale would highly...
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