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under competitive rivalry in porters five forces analysis the following point was given:
where the high fixed costs are involved companies will cut prices to marginal cost levels to protect volume,and drive weaker competitors out of the market.can anybody explain the meaning of the above point?
Let’s say a company has a long term lease where it kust pay rent. Thos is a fixed cost. If the company makes and sells nothing it will still have to pay rent and will make a loss. If the marginal cost (sum of variable costs) are $10 then any selling price over $10 will help the company make a small contribution that can be used to partially cover the rent. To sell enough units to cover all of the fixed costs the company will cut prices to attract customers. It can cut prices all the way down to just above variable costs. The company with the lowest variable costs will be able to have the lowest selling prices and less efficient competitors will be driven from the market.
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