CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
An analyst studies an industry in which many small firms sell nearly identical products, buyers can easily compare prices, and new firms can enter with little capital. Which conclusion about pricing power is most likely?
Firms in this industry most likely have little pricing power and act as price takers. Many sellers offering identical products, easy price comparison and low entry barriers mean any firm raising prices would lose customers, and new entrants would compete away excess profits.
- AFirms have little pricing power and are price takersCorrect
- BFirms have strong pricing power because products are identical
- CFirms can raise prices because entry is easy
Explanation
Many sellers, identical products, transparent prices and low entry barriers describe a highly competitive industry. Firms must accept the market price and have little pricing power. Easy entry erodes any price increase, so the third option is wrong.
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