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Bargaining power of buyers

The presence of powerful buyers reduces the profit potential in an industry. By forcing down prices, bargaining for improved quality or more services, and playing competitors against each other, buyers increase competition within the industry. The result is diminished industry profitability.

The bargaining power of buyers comprises one of the five forces that determine the intensity of competition in an industry. The others are barriers to entry, the threat of substitutes, the bargaining power of suppliers and industry rivalry.

The power of an industry’s important buyer groups depends upon:

  • characteristics related to its market situation
  • the relative importance of its purchases from the industry as compared with its overall business

Power of buyer group

The following conditions indicate that a buyer group is powerful:

  • the buyer group is concentrated, or purchases large volumes relative to the seller’s sales
  • products purchased from the industry represent a significant percentage of the buyer’s costs or purchases
  • products purchased from the industry are standard or undifferentiated—alternative suppliers are easy to find and competitors are played against each other
  • few switching costs exist (i.e., little penalty for moving to another supplier)
  • profits earned are low (i.e., greater incentive to reduce purchasing costs)
  • buyers pose a significant threat of backward integration—buyers demand concessions, and may engage in tapered integration (i.e., producing some components in-house and purchasing the rest from outside suppliers)
  • he industry’s product is not important to the quality of the buyer’s products or services
  • the buyer has full information (i.e., their knowledge of demand, market prices and supplier costs provides them with leverage)

References

Porter, M. (1998).Competitive Strategy. New York: Free Press.

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