Final answer:
Assessment of competitors is crucial because several competitors may already hold a large share of what appears to be a lucrative segment, which can diminish a new entrant's potential returns. Economic theories and real-world examples illustrate the dynamic nature of markets and highlight why understanding competitive forces is essential for a correct assessment.
Step-by-step explanation:
When evaluating market segments, assessment of competitors is important because sales estimates may cause a segment to appear to be lucrative, but there may be several competitors that together have a large share of that segment. This implies that even if a market segment shows potential in terms of sales and profitability, the presence of strong competitors can diminish the attractiveness of entering that market. In particular, antitrust regulators have recognized that competitive conditions vary significantly across different industries, which means that a broad measure of concentration, such as the four-firm concentration ratio or the Herfindahl-Hirschman index, might not always provide an accurate picture of market competition.
A practical example of this concept is seen in the context of monopolistic competitors. If one firm is earning high economic profits, it attracts other firms into the market, potentially leading to a saturation of options and a decrease in available market share for each competitor. This could also force existing businesses to innovate or differentiate further, as seen when a popular restaurant's unique barbecue sauce is replicated by other restaurants aiming to capture a piece of the market share.
Additionally, competition can lead to reduced profits for businesses, and may even drive companies out of business if competing firms offer better or cheaper products, as delineated in the provided reference material.