Quiz 10: Prices, Output, and Strategy: Pure and Monopolistic Competition
According to the porter's strategic framework, there are five forces of competition to be identified in the market for threats to profits. Those five forces are threat of new entrant, threat of substitute, power of supplier, power of buyers and intensity of the rivalry. There is a sixth force added to this framework called Disruptive technology. The term disruptive technology innovation creates a value to the new market by disrupting the existing markets. The bricks-and-motor was worth of a $5.5 billion who made money from the business of movie rental. The decision of entering in the mail-in-delivery and online DVD rental business brought a revolution around. Netflix received a high price competition from a well-established company in the market. The Blockbuster decreased the price to $14.99 which forced Netflix to decrease price to $9.99 per month. However, the brick-and-motor and mail-in movie rental business received a threat from the disruptive technology in the video rental industry by the streaming video on demand. This has become a threat of new entry along with new technology, which has disrupted the bricks and mortar and mail-in the movie rental business. This technology has made viewers an easy access to the videos.
The current internet generation allows accessing many things like music, movies, books etc. for free. Similarly, the internet firms like N and K allowed people to download the MP3 music from the internet for free cost of various devices. In contrast, these kinds of free services are considered as copyright violation. This change in the technology has impacted music companies to have control on distribution of their products. Therefore, N and K have reflected as a disruptive technology in the porter's five force analysis for music industry.
Profitability of PepsiCo and Coca-Cola and bottlers in the cola trade are very different. PepsiCo and Coca-Cola will get an 81 percent of operating profit; bottler garners only 15 Profit as percentage of sales. Porter Five forces can be used to analyze that one type of business is potentially profitable to other. Following are the five forces of Porter model:- • Threat of substitute products and services • Intensity of competition • Bargaining power with suppliers • Potential entrants • Bargaining power of buyers Cola syrup produces the higher profits as comparison to the business related to the bottlers. Few players in the Cola syrup market would make it attractive place for other players to enter the market. Such kind of potential entry threat poses the problem to existing firms in the market. Further, the competition from the existing player is also a threat to firms operating. Cola syrup demand in the market incentivizes the firms to introduce the substitute products in the market. Threat from the consumer side may arise in form changed preferences of consumers towards the products. In sum, these are various factors that can affect the profitability of firm in the long run.