We're talking about the five forces analysis. This is a tool that allows us to think carefully about these five competitive forces, that can have a potentially negative impact on the profitability potential of a particular industry or market segment. So right now we're going to focus on the bargaining power of buyers. What are we talking about when we talk about bargaining power of buyers? A useful way to think about it is, if we were negotiating over a price for our good or service in thus industry. Who gets to wield a little more power in that negotiation? Do the buyers have more power to set the price, or do we have more power to set the price? That's kind of the idea. So, the question is how we know if the bargaining power is low or high? Of course we want it to be lower, that's better for the industry. It's better for the profitability potential of the industry. So how do we know if it's lower? Well buyers are gonna have less power if they are not concentrated. This is a concept from economics known as monopsony. That would be a case where buyers are very concentrated. So if we don't have a monopsony, if there aren't just a few buyers that are very concentrated and powerful, but rather if we're selling to a variety of buyers. Then those buyers won't have as much power. Because if someone doesn't like our prices, if one particular buyer doesn't like it, we've got a bunch of other buyers to choose from, right? So this is, the idea here is that there are many potential buyers and each one of those buyers accounts for a small fraction of our sales of our of our good or service. So one might think about a number if different scenarios, right? So are there many buyers or few, or are there many suppliers or few. So we can think about the quadrants here. When there are many suppliers and many buyers. This is what we think of as a competitive market where the price is just gonna get set by those market forces of supply and demand. There's not a lot of negotiation or bargaining power in either case. It's just kind of a fluid open market where both suppliers and buyers have a lot of choices. Conversely if there are very few buyers and very few suppliers, that might be a slightly different situation but there's sort of mutual dependence there, right? So those cases are a little simpler. It's the off diagonals that are more interesting. So when there are only a few suppliers of a good or service but many buyers, what's that known as? That's known as a monopoly. We've been talking about that. And this monopoly power is very powerful for suppliers. It allows suppliers to set the prices and jack them up as high as they want almost right? So the other off diagonal is more of what we're talking about here, which is what if there are many suppliers but there are only a few buyers? That's what known as monopsony. And in that situation, the buyers will wield much more bargaining power in the setting of prices and the negotiations and dealings in that industry. So what would be an example of that. Maybe defense contracting would be a good example of that. So there might be many manufacturers of missiles, and fighter jets, and tanks, and that sort of thing. But often times operating in a particular nation, there's only one buyer. That federal government is the buyer. There may be a few on the world stage, but the point is many manufacturers, there's lots of jockeying for position in that industry. But very few buyers. So what would we expect? We would expect within that industry the buyer wields a lot of bargaining power. So that would be an example of the sort of Monopsony situation. So what's another thing that might indicate that the bargaining power of buyers is lower? Buyers are going to have less power when they simply have fewer options, right? If they're sort of locked in to buying your product or service because there aren't a lot of alternatives, they're going to have less power to sort of negotiate with you over price in that industry, right? So there's several ways of thinking about this. One is, the extent to which products are differentiated. So this would be the idea sort of low industry cross price elasticity. That's just a fancy way of saying Look if they're highly differentiated products, then those manufactures or dealers of those products are going to be able to charge price premiums for those products. If it's a commodity product industry then there isn't going to be much pricing power on the part of the producers. So buyers, to the extent that buyers are in a market where products are highly differentiated, then they'll have less bargaining power. Because the alternatives don't look quite the same, if that makes sense. What's another indicator? Another indicator might be high switching costs. We can think of these things as sort of relationship specific assets. That's how economists would refer to this. So what are some examples? Maybe think about individuals and your behavior with your laptop computers. Often times people are either Windows consumers or they're Apple consumers. And there's some switching cost if you're gonna swap one for the other. There's a little bit of a learning curve. You might understand how Windows operates, but making the switch to Apple is not that intuitive, or vice versa, right. So in that situation there might be some switching costs to move from one product to the other and that would diminish the bargaining power of the buyers over price. What's another example? Maybe an example is, let's say, there's a coal mine and we're in the industry of coal processing and so we build our plant. Right next to that coal mine, right? Well, if things go awry in terms of our relationship with that particular coal mine, it's gonna cost us a lot to relocate our coal processing plant and put it next to another mine somewhere. Because we've invested all that money, it's located right there. So in other words, they're a high switching cost. So, when we're in a situation like that, as a buyer, the buyer's bargaining power is going to be diminished. There's also this idea that the bargaining power of buyers is gonna be lower to the extent that buyers cannot backward integrate. So what do we mean by that? Well, let's take the example of Coca-Cola. So Coca-Cola sells cans of Coke to us individuals through vending machines, right? But I don't think Coca-Cola's very worried about individual consumers ability to backward integrate, and get into the business of manufacturing soft drinks. It's probably not a big risk to Coke. On the other hand, Coke has other buyers like say Walmart. Now Walmart is a buyer and so they buy a certain amount of Coke products and put them on their shelves. But would Coke be more worried about Walmart's ability to backward integrate and produce their own soft drinks? Yes. In fact, Walmart does that, right? They have their own generic brands, and they figured out how to backward integrate into that supply chain, manufacture their own soft drinks and put them on the shelves as well to compete with Coke. So again, if there's the sense that buyers in an industry have the ability to backward integrate, then that's gonna increase Their ability to bargain with you over price, but if buyers don't have the ability to backward integrate, then that's going to decrease the bargaining power of buyers. Again, which is good. What we want in an industry is for the bargaining power of buyers to be lower.
