Page 50 - FINAL CFA SLIDES DECEMBER 2018 DAY 13
P. 50
Session Unit 14:
48. Introduction to Industry and company analysis
LOS 48.g: Explain the effects of barriers to entry, industry concentration, industry capacity, and
market share stability on pricing power and price competition., p.270
• Barriers to Entry - High barriers benefit existing industry firms; in industries with low barriers
firms have little pricing power and competition reduces existing firms’ return on capital. Low
barriers to entry do not ensure success for new entrants. Barriers to entry may change over
time, and so might the competitive environment.
• Industry Concentration -High industry concentration does not necessarily guarantee pricing
power! tanties
• Industry Capacity –Under-capacity results in pricing power and higher return on capital.
Overcapacity, with supply greater than demand at current prices, will result in downward
pressure on price and lower return on capital.
• Market Share Stability -Market shares that are highly variable likely indicate a highly competitive
industry in which firms have little pricing power. More stable market shares likely indicate less
intense competition in the industry.
• Factors that affect market share stability include barriers to entry, introductions of new
products and innovations, and the switching costs that customers face when changing
from one firm’s products to another. Switching costs, such as the time and expense of
learning to use a competitor’s product, tend to be higher for specialized or differentiated
products. High switching costs contribute to market share stability and pricing power.
