🗊Презентация How Competition Shapes the Creation and Distribution of Economic Value

How Competition Shapes the Creation and Distribution of Economic Value

Ideally, firms in an industry would like to capture most or all of the economic value that they create. Ideally, firms in an industry would like to capture most or all of the economic value that they create. However, competitive forces operate to push that value “forward” to customers (in the form of lower prices), or in some cases, “backward” to suppliers.

Michael Porter developed his Five Forces concept from basic ideas in the field of industrial economics. In this set of lectures, we will see how these economic forces operate. Michael Porter developed his Five Forces concept from basic ideas in the field of industrial economics. In this set of lectures, we will see how these economic forces operate.

The previous lecture illustrated the impact of two of Porter’s “Five Forces of Competition”: The previous lecture illustrated the impact of two of Porter’s “Five Forces of Competition”: Bargaining Power of Buyers Rivalry Between Established Competitors. In this lecture we will consider how all of Porter’s “Five Forces” operate.

Let’s begin with the two forces implicit in the examples from last time. Let’s begin with the two forces implicit in the examples from last time. According to Porter (1980), the bargaining power of buyers depends on buyer concentration, information, and other factors. Consider Examples 1.1 and 1.2 from the last lecture.

Buyer power greater when: Buyers are more concentrated Buyers are better informed

We also saw that an increase in producer rivalry makes the industry less attractive. We also saw that an increase in producer rivalry makes the industry less attractive. Consider examples 1.5 and 1.6.

Implications More direct competitors Industry excess capacity Exit barriers

Now let’s consider the threat of entry. Now let’s consider the threat of entry.

Potential Entrants Almost like rival producers (when entry is fast) Impeded by “entry barriers” (costs of entry) Incumbents can take actions to deter entry

Now let’s consider the impact of “supplier power.” Now let’s consider the impact of “supplier power.” We will add supplier(s) as an additional level of potential value creation, beyond the firm-buyer interactions we have been considering so far. Adding suppliers as a second stage creates a simple “value chain”.

Implications Suppliers can siphon value from producers Power increases with supplier concentration Analysis similar to buyer power Important issue: At what stage(s) are profits captured within the industry “value chain”?

Application

As we will see, substitutes act to reduce the economic value that firms in the focal industry can create. In general, the incremental value created by a given product will diminish as the substitute product becomes cheaper or better in quality. As we will see, substitutes act to reduce the economic value that firms in the focal industry can create. In general, the incremental value created by a given product will diminish as the substitute product becomes cheaper or better in quality.

As we will see, substitutes act to reduce the economic value that firms in the focal industry can create. In general, the incremental value created by a given product will diminish as the substitute product becomes cheaper or better in quality. As we will see, substitutes act to reduce the economic value that firms in the focal industry can create. In general, the incremental value created by a given product will diminish as the substitute product becomes cheaper or better in quality. Let’s start by elaborating the case we saw in the first lecture, in Example 1.1. If you find it helpful to think in terms of specific examples, imagine that the “product” in this example is Apple’s iPod, which we will assume exists in a unique industry by itself. The iPod faces a “substitute” industry, which consists of the set of competing MP3 players. We will start with a base case where the iPod has the entire field to itself without any substitutes. Then, we will introduce MP3 substitutes of poor quality compared to the iPod. Finally, we will see what happens when we improve the substitute’s quality and/or reduce its price.

Competition from Substitutes Reduces buyers’ WTP for the industry’s product. Strengthens bargaining position of single buyer. Given many buyers with varied WTP, lowers the demand curve for the industry’s product. If substitute price falls or quality improves, buyer’s WTP for the focal industry’s product falls.

Impact of Complements Sometimes called the “sixth industry force.” Can be viewed as opposite of substitutes. Increases buyer’s WTP for the industry’s product. Raises the demand curve for the industry’s product. If complement price falls or quality improves, buyer’s WTP for the industry’s product rises.

Conclusions Bargaining Power of Buyers Rivalry Between Established Competitors Threat of Entry Bargaining Power of Suppliers Competition from Substitutes

Conclusions