High Fixed Cost -> Buyer bargaining power

Can any one explain this.

High fixed costs create pressure for all companies to fill capacity, thus leading to price cutting when there is excess capacity, and the customer has more power to determine price through industry competition.

Can u Please give me an example…

An industry with high fixed costs increases operating leverage, so you the more you produce, the cheaper it is to operate in terms of production.

This leads to frequent excess capacities as firms are more incentived to produce and sell, thus giving the customer a better position to demand a lower price to take advantage of industry saturation.

Take Apple and Samsung phones for example. If we assume they are both almost identically great phones, then the customer has power to influence price more than the supplier, since the supplier would find it difficult to reduce production for the price they want, and would have to increase production and push it’s price down to satisfy sales volume.

In short, the higher your fixed costs, the more operating leverage you have, and the more dangerous the amount of sales you make being less than you expect, so you don’t have a lot of power raising prices.

Exactly what MrSmart said :slight_smile: also, the auto manufacturing industry is always cited as being a prime example of an industry with excess capacity where companies will increase production and bring down prices as much as it can to fill/use that extra capacity.

No point in having expensive factories sitting around dormant or producing too far under full capacity as the major costs are fixed and therefore already “sunk” to an extent.

Analogously to MrSmart’s example, the result of all these car plants running at maximum cacity is an increase in the supply of cars…an increase in the supply of cars allows consumers to pick and choose a little more, and demand lower prices…hence increasing their “bargaining power”.

Excellent.Got it…Thanks Mr Smart & S666…