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I am.not able to understand how does long term contracts with the suppliers will reduce the bargaining power of suppliers?
How does the profitability of an industry can be reduced when buyers have strong buying power?
How does the profitability of an industry is reduced if suppliers have high bargaining position?
1 Once you are in a long-term supply contract the supplier has committed to supplying you at an agreed price goods of an agreed quality. It is therefore difficult for the supplier to negotiate price
or quality reductions. Once the contract ends then more negotiation is possible.2 Eg you sell all your goods to two suppliers. They have strong buying power because you cannot afford to lose them. If they push for a price reduction then you probably have to give way rather than risk losing a customer (assuming they are no in a long-term contract with you.. This reduces your profit margins.
3 As above. Eg a monopoly supplier is in a strong position and can more-or less charge whatever they want because you must have their goods.
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