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 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.

 

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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