Bargaining Power of Supplier
- 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.
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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.
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