LIMITED INFORMATION -

CHANGES IN NATURAL
ENVIRONMENT
By:Iverson V. Pareja
LIMITED INFORMATION

 This element refers to the unevenness in the distribution of information

among the actors in market.When market actors are not evenly informed
those with more information can have market power and extract surplus
from the other actors.In monopolistic and oglipolistic industries,existing
market players can have information like new technologies,sources of raw
materials,innovative products,and processes that are not available to other
potential sellers.This information edge can provide market power to
existing market players.On the other hand,in a competitive market
sufficient information is available to all not only to existing players in the
market.As a result,potential players in the market can know this and make
appropriate decisions.
PORTER’S FIVE FORCES OF COMPETITIVE
POSITION
 In this section,the goal of profitability of an industry will still be pursued
through the use of Porter’s Five Forces of Competitive Position.This
framework was developed by Michael Porter (1979) as an alternative
perspective on profitability analysis and on the attractiveness of an industry
for business ventures.The five forces emanate from the competition among
rival firms within the industry,the bargaining power of consumers,the
bargaining power of supplies,the threats of entry of rival firms,and the threat
of substitute products or services.According to Porter,the stronger the forces
of competition have bearing on the industry the lower its profitability and
the less attractive the industry for business enterprises.Because of this.the
appropriate strategy for the industry is to control and manage these forces
in order to enhance the industry’s profitability.
COMPETITION AMONG EXISTING FIRMS
IN THE INDUSTRY
 The first force comes from the competitive behavior of existing players in
the industry.As discussed in the previous section firms within an industry
compete with one another to improve their market control and
profitability.The forces of their competitive behavior will depend on the
structure of the market.In a monopolistic market a company which the sole
seller in the industry will enjoy huge market power.As a consequence,the
competitive pressure coming from rival firms is almost absent low because
the firm is a single producer of a highly differentiated product.
COMPETITIVE MARKET

The aggressive forces coming from rival companies are very intense that a
business enterprise is weak in mitigating these strong forces because there are
too many players in the market selling similar products.In addition,free entry
and even distribution of information reinforce the impacts of these forces that
make profitability very low in a competitive market.
OLIGOPOLISTIC MARKET

 The forces of competition will depend on the behavior and the interactions
of the few firms in the industry.If they cooperate and act like a
monopolist,the forces of competition are mitigated.As a
consequence,profitability can be high for the industry.On the other hand,if
they pursue independent actions imitating the behavior of competitive
firms,the forces of competition are strong and profitability may be low.

Meanwhile,the ability of the sellers to differentiate their products and

appeal to specific market segments in a monopolistically competitive
market can temper the forces of competition.However,these forces of
competition among rival firms can be further heightened because there
are many sellers in the market and the entry is not restricted.As a result,the
profitability in the industry may be moderate if not low.
BARGAINING POWER OF CUSTOMER

 In a market,transactions are made between sellers and buyers.For

sellers,responding to the needs of the customers is a major reason for
engaging in business aside from earning profits.Although buyers are
supposed to be served by sellers the interests of these market players are
conflicting.Utility maximizing buyers prefer lower price to enhance their
level of satisfaction while sellers want higher price to maximize their
profits.These contrasting interests can start a force that can have an effect
on the profitability of the industry.That force comes from the bargaining or
market power of the buyers.
 In a monopsony,a market structure where there is a single buyer,the sole buyer can have a
huge bargaining power on the sellers in the industry.If this sole consumer does not buy from
the company it does not only threaten the profitability of the business enterprise but also its
survival.In addition,If customers are organized they can exercise and exert bargaining
power by demanding the lowest price oossible.For example, a consumer cooperative can
demand huge discounts from sellers because they purchase their products on a wholesale
basis and distribute it to their members on a retail basis.Similarly,large and highly
intergrated companies normally buy their equipment and supplies in bulk so they can exert
bargaining power over their suppliers.

To mitigate the bargaining power of the buyers of the products and enhance the
profitability of the industry there are options that the industry can do.One option is to
diversity the buyers of the product.Diversification frees the dependence of a business
enterprise and the industry on a single or relatively few buyers.Another alternative is for the
industry to sell a variety of differentiated product instead of a single product.By offering
differentiated products in the market the industry is able to segment or divible its product
lines.
 These two options can be seen by analyzing the flow or the disposition of
outputs of the industry.A portion of the outputs of an industry can be bought by
other firms within and outside the industry as intermediate goods and the rest
may be distributed as final goods to consumers,investors,government,and the
rest of the world.To weaken the impact of the bargaining power of a particular
buyer on the profitability of the industry,the industry can distribute a large share
of its outputs to the other sectors mentioned above where the bargaining
power of the buyers is not as significant.For example,if there is a single buyer in
the domestic market exerting too much competitive pressure on the
industry,the industry can try exporting a sizable portion of its products to mitigate
the bargaining power of the domestic buyers.In another example,if the
government is a major buyer of the products of the industry with sizable
bargaining powers,the firms and the industry can concentrate on the
production of intermediate goods where buyers are numerous instead of final
goods where the government is the single buyer.