MARKETING

Product Proliferation & Cannibalization

Product Proliferation & Cannibalization

Introduction

Product proliferation is the strategic decision by an incumbent to preempt entry by creating brands that satisfy every product niche (meaning there is little demand left for a new brand) and to enter profitable market niches before a potential entrant (which rules out profitable entry). Classic examples of industries in which there is significant product proliferation include laundry detergents, bathroom soap, and toothpaste. (Achabal, and Brown 1980)

The proliferation of look-alike products in many sectors, coupled with escalating competition and more demanding customers, have made service excellence one of the key marketing tools for achieving competitive differentiation and fostering customer loyalty. Service quality continues to occupy center stage in the marketing arena even as a growing number of company-customer exchanges through traditional channels are being replaced by Internet-based transactions and e-commerce. (Mason and Milne, 1994)

Commitment Strategies and Product Proliferation

The basic premise of commitment strategies is that before entry occurs the incumbent has the opportunity to make irreversible decisions that alter the payoffs in the post-entry game. These commitments affect the incumbent's response post-entry while simultaneously signalling to potential entrants the desirability of entering ex ante. For example, the decision by the incumbent to invest in extra capacity will reduce its unit cost of production and this will allow it to pursue an aggressive pricing/output policy post-entry. Observing this, potential entrants will realize that they cannot profitably enter the industry. (McLafferty, and Craig 1995)

Irreversible decisions involve sunk costs: Costs that cannot be recovered if the decision is made to exit the industry. Examples of these irreversible decisions include advertising, investment in large sunk production capacity, and product proliferation. Advertising is a type of promotional campaign designed to increase the demand for a product. One way in which advertising can act as a barrier to entry is by creating a cost asymmetry between the incumbent and the potential entrant. Advertising helps to create goodwill for a product: An advertising campaign today will continue to generate demand in the future even if no further advertising expenditure is undertaken. This cumulative effect of advertising means that in order to attract the same level of demand as an incumbent.

The fact that advertising expenditure is a completely sunk cost may increase the difficulties experienced by potential entrants attempting to raise external funds to finance an advertising campaign: In the event of unsuccessful entry, physical plant has some salvage value that can be used as security for a loan, but a failed advertising campaign has no such value. (Plastria and Carrizosa 2004)

The established position of incumbents is reinforced if economies of scale in advertising are important. Such economies can arise from threshold effects (a minimum number of advertising messages are required to influence consumers) and also because as a sunk fixed cost, average costs decline as the volume of advertising increases. With large sunk capacity the  incumbent incurs higher fixed costs to obtain lower marginal costs of production, and these, in turn, require larger outputs for profit ...