Question

Buyers have higher market power when __________ firms sell a highly differentiated product.

Answer 1

Answer:

The correct answer is letter "C": their switching costs are low.

Explanation:

Consumers incur switching costs if they are penalized by direct or indirect costs for changing a manufacturer, brand or commodity. Switching costs are typically monetary but can also reflect the time and effort required to make a change. A major barrier to market improvements can be high switching costs.

Thus, if there are no switching costs consumers will have more buying power since they will freely decide what to spend their money without the constraints of penalties.

Answer 2

Answer:

The correct answer is the option B: their switching costs are low.

Explanation:

To begin with, the term known as market power, in the business world, refers to the ability that the customers have in order to make a great change in the market regarding quantity demanded or price of the product even. Moreover, this type of power is due to certain characteristics in some markets.

To continue, in the case presented above, the buyers have higher market power when their switching costs are low due to the fact that the customers find the price of the products among the companies very similar although the products might be different. And therefore that switching among the companies do not represent a high cost for the customers, given them high market power.