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Thought starter

Who can live with this price? Reading a cost curve

An industry cost curve lines up each player's unit cost, lowest first, and sets the market price against it. The width of the bars is the volume of capacity of each player at that price. It shows who makes money at today's price, who would stop if the price fell, and what a new entrant would face.

What the curve shows

A strong position in an attractive segment Illustrative
  • You: Unit cost $60, capacity 3
  • Rival A: Unit cost $75, capacity 2
  • Rival B: Unit cost $85, capacity 2
  • Next entrant: Unit cost $110, capacity 1
  • Market price: $100

Unit cost for each player, lowest first, under the market price. Each column is as wide as the player's capacity.

Each bar is one player. Its height is the cost of making and delivering one unit. In a full curve, its width is how much the player supplies. The line across the curve is the price the market pays.

Players whose bars sit below the line make money on each unit. Players above it lose money, and they are the first to cut capacity or leave if the price stays where it is. The last bar is often the next player who could enter. If it sits above the price, entry does not pay today.

Three questions it answers

  • Can we live with a lower price? Find your bar. The distance between its top and the price is your room before a price fall costs you money.
  • Who leaves first? The players at the high end of the curve. If one of them closes, supply falls, and the price can recover for everyone below.
  • Is our position strong? A strong position sits well below the price, in a market where the next entrant sits above it.

Building one

Start with your own unit cost, split into its parts. Then estimate each main rival's, from their public reports, input prices and what customers say. Determine as best you can the capacity that each player can supply at their price. Sometimes a player can have two bars if they have two different manufacturing facilities or two different mines etc. Each of these would have a price and capacity.

Treat each estimate as a range. The common trap is assuming rivals' costs look like yours. A rival with a different model can sit far below you on the curve.

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