The rivalry among competing sellers in an industry intensifies when:
A buyer demand for the product is growing rapidly.
B as the number of rivals increases and as they become more equal in size and competitive capability.
C when the products of rival sellers are highly differentiated products and the industry consists of so many rivals that any one company’s actions have little direct impact on rivals’ business.
D when buyer demand is strong and sellers have little or no excess capacity and only minimal inventories.
E when customers are brand loyal and their costs to switch to competing brands or substitute products are relatively high.
The correct answer and explanation is :
The correct answer is B: as the number of rivals increases and as they become more equal in size and competitive capability.
Explanation:
Rivalry among competing sellers in an industry is a key determinant of competitive dynamics, and the intensity of this rivalry is influenced by several factors. When there are more competitors in an industry and they become more equal in size and competitive capability, rivalry tends to increase because:
- Greater competition for market share: As more rivals enter the market, each company fights for a portion of the same customer base. When companies have comparable size and capabilities, no single firm has a clear dominance or competitive advantage, which can lead to aggressive competitive behavior. Each competitor is trying to outperform the others to capture a larger market share.
- Increased strategic focus: When competitors are more equal in terms of resources and capabilities, they tend to adopt similar strategies (such as pricing tactics, promotional campaigns, product differentiation, etc.) to attract customers. This often leads to a price war, enhanced marketing campaigns, or other forms of aggressive competition to stand out, which makes rivalry more intense.
- Reduced differentiation: If rivals are similarly sized and capable, their products may become less differentiated, making it harder for any one company to stand out. This can drive firms to engage in more aggressive tactics like lowering prices or increasing promotional efforts to capture attention in a crowded market.
- Heightened focus on innovation: Firms may focus more on innovation and differentiation to gain a competitive edge. As they seek ways to differentiate their products, the competition escalates, further intensifying rivalry.
Why the other options are incorrect:
- A: When buyer demand is growing rapidly, competition may initially be less intense, as companies can grow with the demand without direct conflict. However, intense competition often arises when demand starts to stabilize.
- C: If products are highly differentiated, competition may be based on brand loyalty rather than direct rivalry, reducing the intensity of competition.
- D: Strong buyer demand with limited capacity could increase competition temporarily but typically leads to a focus on meeting demand rather than intensifying rivalry.
- E: When customers are brand loyal and switching costs are high, companies may have a more stable market share, and the intensity of rivalry may decrease since customers are less likely to switch to competitors.