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Profit-Increasing Consumer Exit

Author

Listed:
  • Amit Pazgal

    (Jesse H. Jones School of Management, Rice University, Houston, Texas 77005)

  • David Soberman

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

  • Raphael Thomadsen

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

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.

Suggested Citation

  • Amit Pazgal & David Soberman & Raphael Thomadsen, 2013. "Profit-Increasing Consumer Exit," Marketing Science, INFORMS, vol. 32(6), pages 998-1008, November.
  • Handle: RePEc:inm:ormksc:v:32:y:2013:i:6:p:998-1008
    DOI: 10.1287/mksc.2013.0804
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    References listed on IDEAS

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    Cited by:

    1. Yiquan Gu & Leonardo Madio & Carlo Reggiani, 2019. "Exclusive Data, Price Manipulation and Market Leadership," CESifo Working Paper Series 7853, CESifo.
    2. Harutyunyan, Mushegh & Jiang, Baojun, 2017. "Strategic Implications of Keeping Product Value Secret from Competitor’s Customers," Journal of Retailing, Elsevier, vol. 93(3), pages 382-399.
    3. Pazgal, Amit & Soberman, David & Thomadsen, Raphael, 2016. "Profit-increasing asymmetric entry," International Journal of Research in Marketing, Elsevier, vol. 33(1), pages 107-122.
    4. Wang, Wei & Li, Gang & Fung, Richard Y.K. & Cheng, T.C.E., 2019. "Mobile Advertising and Traffic Conversion: The Effects of Front Traffic and Spatial Competition," Journal of Interactive Marketing, Elsevier, vol. 47(C), pages 84-101.
    5. Rehnen, Lena Marie, 2016. "Exit strategies of loyalty programs," jbm - Journal of Business Market Management, Free University Berlin, Marketing Department, vol. 9(1), pages 564-596.
    6. Lepthien, Anke & Papies, Dominik & Clement, Michel & Melnyk, Valentyna, 2017. "The ugly side of customer management – Consumer reactions to firm-initiated contract terminations," International Journal of Research in Marketing, Elsevier, vol. 34(4), pages 829-850.
    7. Kinshuk Jerath & S. Sajeesh & Z. John Zhang, 2016. "A Model of Unorganized and Organized Retailing in Emerging Economies," Marketing Science, INFORMS, vol. 35(5), pages 756-778, September.

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