Final answer:
Potential entrants decrease industry profitability by increasing competition, which tends to lower prices and profits for existing firms. The introduction of cost-reducing technology in a perfectly competitive market leads to lower prices and can shift market power towards more efficient companies.
Step-by-step explanation:
The impact of potential entrants on industry profitability in Porter's Five Forces is that they decrease industry profitability. This happens because as new entrants join the market, competition increases which typically leads to a reduction in prices and profits for existing firms. Moreover, potential entrants add a level of uncertainty as they may bring new innovations and business models, which can further erode the market share and profitability of established companies. In a perfectly competitive market, if new technology introduces a substantial reduction in costs of production, it would lead to lower product prices. Companies that adopt such technologies can offer their goods at a lower price, thereby gaining a competitive edge. This advantage can lead to increased market share for efficient firms but can also drive less competitive firms out of the market.
In markets where entry is easy, firms have little market power as products are typically standardized and customers can easily switch suppliers without incurring significant costs. In contrast, markets with high barriers to entry allow incumbent firms to maintain greater market power. Competition in these markets might not be solely on price but also on factors such as advertising, brand loyalty, or product differentiation.