One of the fastest growing industries in the last twenty years is the memory chip industry, which supplies memory chips for personal computers and other electronic devices. Yet the average profitability for this industry has been very low. Using the industry analysis framework, list all the potential factors that might explain this apparent contradiction

Answer 1

Concentration and Balance of Competitors. The concentration of the memory chip market is relatively low. There are many players that compete on a global basis, none of which has a dominant share of the market. Due to this high degree of fragmentation, price wars are frequent as individual firms lower prices to gain market share.
Degree of Differentiation and Switching Costs. In general, memory chips are a commodity product characterized by little product differentiation. While some product differentiation occurs as chip makers squeeze more memory on a single chip or design specific memory chips to meet manufacturers' specific power and/or size requirements, these differences are typically short-lived and have not significantly reduced the level of competition within the industry. Furthermore, because memory chips are typically interchangeable, switching costs for users of memory chips (computer assemblers and computer owners) encouraging buyers to look for the lowest price for memory chips.
Scale/Learning Economies and the Ratio of Fixed to Variable Costs. Scale and learning economies are both important to the memory chip market. Memory chip production requires significant investment in "clean" production environments. Consequently, it is less expensive to build larger manufacturing facilities than to build additional ones to satisfy additional demand. Moreover, the yield of acceptable chips goes up as employees learn the intricacies of the extremely complicated and sensitive manufacturing process. Finally, while investments in memory chip manufacturing plants are typically very high, the variable costs of materials and labor are relatively low, providing an incentive for manufacturers to reduce prices to fully utilize their plant's capacity.
Excess Capacity. Historically, memory chip plants tend to be built in waves, so that several plants will open at about the same time. Consequently, the industry is characterized by periods of significant excess capacity where manufacturers will cut prices to use their productive capacity (see above).
Threat of Substitute Products. There are several alternatives to memory chips including other information storage media (e.g., hard drives and disk drives) and memory management software that "creates" additional memory through more efficient use of computer system resources.
Price Sensitivity. There are two main groups of buyers: computer manufacturers and computer owners. Faced with an undifferentiated product and low switching costs, buyers are very price sensitive.
All the above factors cause returns for memory chip manufacturers to be relatively low.