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CFA Level I · CFA Level I Exam · Industry and Competitive Analysis

A company sells a product with few substitutes to customers that face high switching costs. Rival firms, however, are expected to enter after a patent expires in two years. Which assessment of the company's long-run pricing power is most appropriate?

Pricing power is strong now but likely to weaken. Few substitutes and high switching costs support current prices, but patent expiry removes a key barrier to entry, so new competitors will likely pressure prices and margins over the longer run.

  1. AStrong now, but likely to weaken as barriers to entry fallCorrect
  2. BStrong and sustainable, because switching costs are permanent
  3. CWeak now, because few substitutes exist

Explanation

Few substitutes and high switching costs support current pricing power. Patent expiry removes a barrier to entry, so new rivals will likely erode it. Switching costs reduce but do not eliminate the effect, and few substitutes imply strength, not weakness.

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