CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
Two industries have similar demand growth. Industry X has high fixed costs, slow exit because assets are specialized, and products that buyers see as undifferentiated. Industry Y has low fixed costs and differentiated products. Compared with Y, industry X most likely experiences:
Industry X most likely has more intense rivalry and greater price discounting in downturns. High fixed costs encourage firms to cut prices to fill capacity, specialized assets block exit, and undifferentiated products make price the main competitive weapon, depressing margins.
- Aless intense rivalry and higher profit margins
- Bsimilar rivalry because demand growth is equal
- Cmore intense rivalry and greater price discounting in downturnsCorrect
Explanation
High fixed costs push firms to fill capacity by cutting prices, high exit barriers keep excess capacity in the industry, and undifferentiated products make price the main basis of competition. All three intensify rivalry, especially in downturns.
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