What is the relationship between fixed costs and industry rivalry?

The relationship between fixed costs and industry rivalry is significant, particularly because high fixed costs can indeed intensify competition among firms. In industries where fixed costs are substantial, companies often aim to spread these costs over a larger volume of sales. This need for volume can lead to aggressive pricing strategies as firms compete to attract customers. As businesses strive to cover their fixed costs, they may reduce prices or offer promotions to increase their market share, which can trigger a cycle of price competition. This dynamic creates an environment where the intensity of rivalry is heightened as each firm seeks to maintain its profitability in the face of fixed cost pressures.

In contrast, lower fixed costs do not require the same volume of sales to break even, which can lead to a less intense competitive environment. Companies might have more flexibility in their pricing strategies and may not feel as pressured to engage in aggressive competitive behaviors. Additionally, the notion that fixed costs have no influence on competitive behavior does not acknowledge how cost structures impact strategic decisions and market dynamics, thereby affecting the overall rivalry in the industry. Hence, the correct understanding lies in recognizing how high fixed costs can prompt firms to behave more competitively to ensure they cover their expenses and maintain their market position.