Technology improvements bring falling prices

Symptom: Prices have fallen in real terms as technology develops.

Implications for the market:

A common and potent cause of hostility in many industries is overcapacity brought about by technological change.
- New technology often offers greater process efficiency, and with that comes the promise of larger margins at current prices. Competitors can often economically justify investments to increase and upgrade capacity.
- Invariably these process innovations diffuse rapidly through the industry, resulting in an "involuntary" aggregate capacity increase. Competitors find themselves with excess capacity and a cost structure with a high fixed cost component.
- The result is the "commoditization" of the market as competitors discount to build the volume necessary to cover fixed costs.
This period of hostility is likely to continue for a few years until demand catches up with the increased capacity.
As a result, prices are unlikely to recover in the near term.

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

"Hostility in a Differentiated Market"
A bottle of wine is surely a differentiated product. Nevertheless, the table wine industry underwent the same economic traumas faced by more traditional industries.
"Can We Raise Margins With A Price Increase?"
Before a company commits itself to a price increase, it should check marginal costs in the industry and the ability of low cost producers to expand.
"The Myth of the Hockey Stick"
From the early stages of hostility, real improvement in price was a long time in coming.
"What Ends Hostility?"
The challenge for business leaders is to recognize the true end of a hostile market place when it arrives and to avoid being deceived by a temporary ending.