If supplier power is low and barriers to entry are high, what is the likely effect on industry profitability?

If supplier power is low and barriers to entry are high, what is the likely effect on industry profitability?

• A. Profitability increases.
• B. Profitability decreases.
• C. Profitability unaffected.
• D. Profitability becomes highly volatile.

Answer: (B)

When suppliers have little power, firms can secure inputs at lower costs and with more favorable terms, protecting margins. At the same time, high barriers to entry keep new competitors from Entering, reducing the threat of price competition and market share erosion. Put together, you get higher and more sustainable profits for the industry. So profitability tends to rise in this scenario. If supplier power were high or barriers to entry were low, profits would more likely face downward pressure from higher costs or more entrants, respectively.

When suppliers have little power, firms can secure inputs at lower costs and with more favorable terms, protecting margins. At the same time, high barriers to entry keep new competitors from Entering, reducing the threat of price competition and market share erosion. Put together, you get higher and more sustainable profits for the industry.

So profitability tends to rise in this scenario. If supplier power were high or barriers to entry were low, profits would more likely face downward pressure from higher costs or more entrants, respectively.