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.

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