Choose an Australian industry and analyse the most important factors affecting its profitability by using the relevant concepts and theories we have studied in Lectures 1-9. You should choose three or four specific profitability-influencing factors. You can choose factors that are currently affecting your chosen industry, or factors that seem likely to affect the industry’s profitability in the near future. Some possibilities to consider are:
• Internal rivalry and the market structure: Which market structure best describes the market (i.e. perfect competition, monopoly etc.)? Provide measures of industry concentration if you can. Do you have reasons to believe that the market structure is likely to change in the future? Is the struggle for market share and increased profitability reflected mainly in price competition or in non-price competition? If it is non-price competition, what form does it take?
• Threat of entry: Are there barriers to entry in your chosen industry? Consider how brand loyalty, economies of scale, intellectual-property law, and government regulation can each contribute to barriers to entry.
• Substitutes and complements: Are there important substitutes and complements (in consumption) that could affect industry profits? You can consider related products that are either currently available or might soon become available.
• Bargaining power of buyers: Is the input of your chosen industry bought by few large buyers with market power or a multitude of price-taking individual buyers with no market power? How does that affect profits? Have producers made relationship-specific investments with their buyers?
• Bargaining power of suppliers: Is the market for inputs in your chosen industry concentrated or competitive? Here, you can choose to consider the markets for labour, land, raw materials, and capital. How does the relative concentration in that market affect input costs, and how can input costs affect your chosen industry’s profits? Have the producers in your chosen industry made relationship-specific investments with their input suppliers (for example, moving their factory close to a supplier’s business)? Can the supplier exploit this situation and how would that affect profitability? Are there substitute inputs that producers in your chosen industry can turn to?
• Costs: What sort of cost structures do the firms in the industry face? Do the firms face any economies/diseconomies of scale, scope, and/or learning? How will these cost structures likely to affect the firms’ profit-maximising decisions?
• Technological change: Are there technological changes that are likely to affect profitability in your chosen industry?
• Government policy: Are there government policies that affect profitability via any of the factors above (e.g., raising barriers to entry) or in a different way?
• Price discrimination: To what degree are firms in your industry able to engage in price discrimination? What type of price discrimination is it? How important is price discrimination for firms’ profits?
• Elasticity of supply/demand: The determination of whether supply and/or demand are relatively elastic or inelastic would often be important when considering the other factors listed above. Still, if you believe that certain factors can change the elasticity of supply or demand in your industry leading to changes in profitability, feel free to discuss them separately
To summarise, in this case study you should:
• Introduce and define the industry that you will analyse;
• Briefly describe the first factor you will study and analyse it to determine how it affects the industry’s profitability. Where possible, provide evidence;
• Perform the same steps with the second factor you are considering;
• Perform the same steps with the third and fourth factors you are considering (if there is a fourth one)