CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
An analyst is building a forecast for a firm in a mature industry with many rivals offering similar products and low switching costs for customers. Compared with a firm in an industry with high switching costs, the first firm's pricing power is most likely:
Pricing power is most likely lower. With many similar rivals and low switching costs, buyers can easily move to competitors, which raises buyer bargaining power and rivalry intensity, so the firm cannot raise prices without losing customers. Cost levels alone do not determine this power.
- Ahigher, because rivalry restrains industry capacity
- Bunchanged, because pricing power depends only on costs
- Clower, because buyers can easily move to competitorsCorrect
Explanation
Low switching costs increase buyer bargaining power, and many similar rivals intensify rivalry. Both limit the firm's ability to raise prices. Costs alone do not determine pricing power, and rivalry does not restrain capacity here.
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