New competition is entering a settled market

Symptom: Until recently the market was the almost exclusive domain of the large manufacturers. Competition has started slowly.

Implications for the market:

• If new entrants succeed, they will do so at the expense of established competitors.

• • Markets with four or fewer competitors are often highly lucrative since relatively little price competition exists.

  • In these highly lucrative markets, competitors often allow costs to grow even faster than profits. Once profits are high, companies show a strong tendency to add cost to the product in order to satisfy customers paying high prices and to maintain the high profits.

  • Because of their high cost structure, established companies are naturally reluctant to compete on price. Their reluctance provides an opportunity for new entrants to enter by undercutting the leaders' prices.

  • These new entrants often grow faster than the market, drawing away demand that formerly went to the established competitors and leading the industry toward hostility.

• With increasing volume the new entrants have increased profits, and, hence, an improved capability of sustaining low prices.

• As a result, price competition is probable for some time.