The Five Strategic Market Forces

Competition Watchdog

Michael Porter's Five Strategic Market Forces

Yuval Levy's submission to the World Wide Panorama: Markets, March 2005

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.

Examples

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.

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