How is the typical profitability of a stage 2 firm different from a stage 1 and a stage 3 firm?
What will be an ideal response?
Stage 1 represents the initial or start-up stage of firms within a particular industry. At this point, the firms tend to have very low demand and hence low revenue, but high prospects for revenue growth. Because start-up costs are large, profits are typically negative. In this stage, firms often require a significant amount of cash in order to grow. During stage 2, revenue tends to grow rapidly and positive profits materialize while competition is relatively muted. This is frequently the point at which private firms "go public," meaning they issue equity shares through an initial public offering process. Also, this is often the period when firms within the industry consolidate, as well as when firms with poor prospects tend to die out. In stage 3, competition intensifies, revenues continue to grow but at a slower or more mature rate, and firms tend to become more efficient as costs are controlled. However, increased competition may put downward pressure on profit margins.
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