There are firms that have a strong market position with its own market – perhaps even a monopoly. The threat of substitutes cannot be underestimated. Similarly, we can also model different components of Porter’s five forces analysis, for example, the network exchange between customers and Sephora, using the Nash Bargaining solution. So in a Nash Bargaining solution, Sephora shares 50+20/2 = 60 and Beauty Networks shares 30+20/10 = 40. If Beauty Networks sells their products on Ulta Beauty, they get a revenue of 30. If Sephora does not sell Beauty Networks products, they can feature another popular makeup brand that targets a young audience with a revenue of 50. For example, if Sephora wants to feature a popular makeup brand called Beauty Networks, which targets college students. Since Sephora offers many discounts and a variety of options, the customer’s bargaining power is low because the demand for Sephora products is high.Īfter decomposing the bargaining power of Sephora, we can model a network exchange between a cosmetic brand and Sephora. The bargaining power of niche brand is low because if they don’t introduce their products in Sephora, they don’t have access to a large base of customers. The bargaining power of popular cosmetic brands is moderate because selling their products in Sephora increases the revenue, but they have more bargaining power since Sephora wants to feature a popular brand.
The rivalry among existing competitors is high because companies such like Ulta Beauty and Feelunique are popular cosmetic chains that also feature different brands of similar products. Since there are department store and drugstore that sells the similar products as Sephora, the threat of substitutes is moderate. Applying Porter’s five forces to Sephora, we can see that Sephora has a lower threat of new entrants because the entry barrier of starting a cosmetics chain that features different brands is high. It is a French brand that features more than 300 cosmetics brands including makeup, skincare and fragrance. For example, Sephora is one of the most popular cosmetic chain. It can be applied to the cosmetic retail industry. Porter’s five forces practically measures a company’s competitiveness or bargaining power. The bargaining power of customers is weakened when there are fewer competing firms available. This forces analyzes how customers affect the price and quality of the products. An increasing number of suppliers weakens the bargaining power of suppliers. This forces analyzes how much power and control the suppliers have to raise prices that lower a company’s profits. Competing with industry rivalries lead to more money invested in advertising and potentially a price war. Rivalry competition is intense when there are just a few businesses equally selling a product or service. For example, people who buy Pepsi can easily switch to buying coke. A company’s bargaining power is weakened if customers can switch to another company that sells similar product with a fairly easy cost. Because a profitable industry that yields high returns attracts new firms to join, and new entrants lower the profitability of the business. Porter’s five forces for a business consists of following component: I’m interested in real world applications of bargaining power in networks, so I ended up searching Porter’s five forces analysis, which is a practical framework that measures the competitiveness of a business. In addition, we also learned about how bargaining power increases when one person has more options relative to the others in a network exchange. In a two-person bargaining problem, Nash bargaining solution provides a way to divide the surplus, or outside options of both players. In class, we learned about how Nash bargaining balances the outcome of an network exchange. Porter’s Five Forces Analysis and Sephora’s Bargaining Power
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