An equity analyst follows two industries with the following characteristics:
The economic profit (the spread between the return on invested capital and the cost of capital) tends to be larger in industries with differentiated products, greater pricing power, and high switching costs to customers. Industry 1 has these features. In contrast, firms in Industry 2 have little pricing power (undifferentiated products and rapid shifts in market shares, indicating intense rivalry), which is indicative of potentially smaller economic profits.