Which of the following industry characteristics would most likely lead to good pricing power for industry participants? a)high barriers to entry c)tight industry capacity d)high industry concentration ratio
Tight industry capacity is most likely to lead to good pricing power for industry. Capacity refers to the potential amount of output (good or services) that the industry can supply in a period. Tight capacity means that demand exceeds supply, which would provide good pricing power.
High barriers to entry may not necessarily lead to good pricing power. The industry might have strong competition among existing firms. Think of the automotive industry.
High industry concentration ratio (meaning few firms in the industry) also might not necessarily lead to good pricing power. The rationale is similar to the scenario for the industry with high barriers to entry: the industry might have strong competition among existing firms (again, think of the automotive industry).
BullishBear Finance
i see what your saying how ever when you have high barriers to entry. Wouldn’t you be an oligolopoly or even a monopoly. thus setting your own pricing power?..
Actually, it depends on the scale that you have relative to your competitor, for example, Boeing and Airbus are the perfect case of almost a perfect duopoly (you have Embraer here in Brazil, but they are tiny compared to them), but since no one is big relative to each other if one wins, the other loses, so competition can be stiff. Compare to Home Depot and Lowes that are huge compared to the next guy but still can compete without a zero sum game between them. The relative size is much more relevant than absolute.
Nice examples AndyBernard.
BullishBear Finance