Profit-Increasing Consumer Exit

Posted: 5 Dec 2013

See all articles by Amit Pazgal

Amit Pazgal

Rice University

David Soberman

University of Toronto - Rotman School of Management; INSEAD

Raphael Thomadsen

Olin School - Washington University in St. Louis

Date Written: December 4, 2013

Abstract

This paper examines the phenomenon of profit-increasing consumer exit and the related phenomenon of profit-decreasing consumer entry. We demonstrate that firms can be better off in shrinking markets and worse off in growing markets, even in the absence of competitive entry or exit. Specifically, firms may benefit if a segment of consumers who are relatively indifferent about consuming any product in the category leave the market. Profits can increase for all firms even if the exiting consumers have strong preferences for only one of the products in the market. In shrinking markets, it is reasonable to assume that the people who are likely to exit the market first are people who are “least committed” to the category. In particular, people who are the least satisfied with the existing offers are the most likely to change their behavior by finding an alternative or adopting a new technology. Similarly, in growing markets, consumers who enter the market late are generally the least committed to the category. Such exiting can relax the competitive pressure between firms and lead to increased profitability. Our findings provide an explanation for profit growth that has been observed in product industries exhibiting slow and predictable declines over time, including vacuum tubes, cigarettes, and soft drinks.

Keywords: competitive analysis, analytic models, game theory, market evolution

Suggested Citation

Pazgal, Amit I. and Soberman, David and Thomadsen, Raphael, Profit-Increasing Consumer Exit (December 4, 2013). Marketing Science, Vol. 32, No. 6, 2013; pp. 998–1008; DOI: 10.1287/mksc.2013.0804, Available at SSRN: https://ssrn.com/abstract=2358792

Amit I. Pazgal (Contact Author)

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

David Soberman

University of Toronto - Rotman School of Management

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
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416 978 5433 (Fax)

INSEAD ( email )

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0160745596 (Fax)

HOME PAGE: http://www.insead.edu

Raphael Thomadsen

Olin School - Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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