Profit-Increasing Consumer Exit
Posted: 5 Dec 2013
Date Written: December 4, 2013
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
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