AFM433 Chapter Notes - Chapter 6: Customer Switching, Network Effect, Fixed Cost

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM433
• Professor: Mark Arnason

Document Summary

Firms that produce at large volumes enjoy lower costs per unit. Spread fixed costs over more units: more efficient technology. Favourable terms from suppliers: demand-side benefits of scale, network effects, buyer"s willingness to pay increases with the number of other buyers, trust larger companies for a crucial product, customer switching costs. Fixed costs buyers face when changing suppliers: alter product specifications, modify processes or information systems, capital requirements. Fixed facilities: extend customer credit, build inventories. Incumbents possess substantial resources to fight back: excess cash, unused borrowing power, available productive capacity. Incumbents are likely to cut prices to retain market share. Industry growth is slow: new comers only gain market share by taking it from incumbents, the power of suppliers, suppliers of labour, powerful supplier group. Little effect on the buyer"s other costs: the threat of substitutes, same of similar function as the industry"s product by a different means.