Question

Suppliers are more likely to be powerful relative to the firms to which they sell their goods and services if: a. differentiation among existing suppliers is high. b. the suppliers' industry is highly fragmented. c. existing suppliers lack economies of scale. d. suppliers' goods or services cannot be substituted effectively. e. cost advantages independent of size are negligible.

Answer 1

D) suppliers' goods or services cannot be substituted effectively.

Step-by-step explanation:

Generally when the supplier's industry is highly concentrated (i.e. dominated by only a few firms: oligopoly) or the products do not have direct substitutes, the supplier power increases.

In perfect competition, the power of suppliers and buyers is limited because:

1. there are a lot of suppliers and a lot of buyers, so they are all price takers.
2. the goods and services are homogeneous, which means that they are all very similar, therefore, they are all substitute products to each other.
3. low barriers of entry and exit.

Whenever any of the three conditions is missing, market failures exist (high supplier power is a type of market failure).

Answer 2

Option D is the correct option

Step-by-step explanation:

The bargaining power of the supplier is only high when the products of other supplier are not highly differentiated, presence of fewer suppliers of the product, fewer substitutes are possible and the costs of the existing supplier are high (Rivalry would be low). All this constitutes to competitve advantage to a firm if its product possesses differentiation, its products can be substituted, possesses greater control over costs, etc. So the only option that matches this criteria is option D.