Relative Bargaining Power in Input and

Output Markets
While degree on competition in an industry determines
whether or not there is potential to earn abnormal profits,
the actual profits are influenced by the industry's
bargaining power with its suppliers and customers. On
the input side there is labor, raw materials and
components, and finances. On the output side firm may
either sell directly to the final customers, or enter into
contract with intermediaries in the distribution chain.
There is a competition among all these factors called
relative bargaining

4. Bargaining Power of buyers

Depends on:
1. Price sensitivity: Buyers are more price sensitive when
the products are undifferentiated and switching cost is
low.
2. Relative bargaining power: In a monopoly market
there is low bargaining power of the buyers and in a
perfect market there is high bargaining power of the
buyers. This in turn, depends on number of buyers
relative to number of sellers, as well as the volume per
buyer.

5. Bargaining Power of Suppliers

Suppliers bargaining power is the opposite to the
bargaining power of the buyers. In a monopolistic and
oligopolistic market the supplier or suppliers have strong
bargaining power. (Example: Power of Coke-Pepsi on
bottlers) On the other hand, in a perfect market they do
not have a bargaining power as they have to accept the
market price. (Example: can producers lack power).
Market of intermediate goods also determines the
bargaining power when they are the exclusive suppliers
for the next sequence of producers. (IBMs unique
position as mainframe suppliers dominates computer
leasing business)
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Industry Analysis: Case Study

Personal Computer Industry

Introduction: Computer industry introduced in 1981 when IBM

announced its PC with Intels microprocessor and Microsofts DOS
operating system. With tremendous growth, in 1997 there was 100
million PC installed capacity, 30 million PC overseas sales with 21%
annual growth rate. Since then the profitability went down. Despite
the spectacular growth in 1998 the industry experienced low
profitability. Why?
Concentrated market: Top 5 firms sharing 60% so price cut was
common. The industry began in 1981 by the IBM with Intel microprocessor
and Microsofts DOS operating system.

Undifferentiated products: Many firms producing identical products

and acute competition experienced price cut.
Large scale economies: Components share 60% of the price, so
large procurement needed.
Low switching cost as different brands use same Intel microprocessor
and Microsoft Windows operating system
Easy access to distribution channel
Easy entry due to easy availability of spare parts. (Michael Dell
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started Dell computers with mare assembling at his dormitory room)

Industry Analysis: Case Study (Contd.)

Personal Computer Industry

Substitute products like Apples Macintosh computers offered competition

Power of suppliers and buyers: Intel (microprocessor) and Microsoft
(DOS) hold strong bargaining power as suppliers. From 1983 to 1993
corporate buyers became price sensitive as computer procurement cost
was very significant for successes, and once being aware of the
technology brand names mattered little to them.
Tremendous pressure on firms to spend large sums of money to
introduce new products rapidly, maintain high quality, and provide
excellent customer support contributed to low profit potentials.
Prospective issue: Dominance of Intel and Microsoft in input market is
going to continue which indicates little change of the structure of the
industry in future as well
Limitation of the analysis: Industry may not have clear boundaries
(Shadow zones: workstation, manufacturers abroad, for Dells industry
analysis IBM compatible PCs vs. all PCs)
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