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profit margins on brand-name cereals had reached 40 percent or higher. This invited limited entry by private-label manufacturers Malt-O-Meal and Ralston Purina. Even so, most of the successful newcomers have chosen niche markets, such as granola-based cereals, in which they may try to offset their cost disadvantage by charging premium prices.

Marketing Advantages of Incumbency

Chapter 2 discussed umbrella branding, whereby a firm sells different products under the same brand name. This is a special case of economies of scope but an extremely important one in many consumer product markets. An incumbent can exploit the umbrella effect to offset uncertainty about the quality of a new product that it is introducing. The brand umbrella makes the incumbent’s sunk cost of introducing a new product less than that of a new entrant because the entrant must spend additional amounts of money on advertising and product promotion to develop credibility in the eyes of consumers, retailers, and distributors.

The umbrella effect may also help the incumbent negotiate the vertical chain. If an incumbent’s other products have sold well in the past, distributors and retailers are more likely to devote scarce warehousing and shelf space to its new products. When Coke or Pepsi launches a new product, for example, grocery retailers are confident that there is solid market research behind the launch and are willing to allocate scarce shelf space to them. At the same time, suppliers and distributors may be more willing to make relationship-specific investments in or sell on credit to successful incumbents.

A brand umbrella may increase the expected profits of an incumbent’s new product launch, but it might also increase the risk. If the new product fails, consumers may become disenchanted with the entire brand and competitors may view the incumbent as less formidable. Thus, although the brand umbrella can give incumbents an advantage over entrants, the exploitation of brand name credibility or reputation is not risk free.

Barriers to Exit

To exit a market, a firm stops production and either redeploys or sells off its assets. (A change in ownership that does not entail stopping production is not considered an exit.) When deciding whether to exit a market, the firm must compare the value of its assets if deployed in their best alternative use against the present value from remaining in the market. There are exit barriers when the firm chooses to remain in the market but, given the opportunity to revisit its entry decision, would not have entered in the

first place. Figure 6.2 illustrates how this can happen. The price Pentry is the entry price—the price at which the firm is indifferent between entering the industry and

staying out. The price Pexit is the price below which the firm would either liquidate its assets or redeploy them to another market. Exit barriers drive a wedge between Pexit

and Pentry. Because Pexit , Pentry, firms may remain in a market even though price is below long-run average cost. For this reason, high exit barriers are viewed negatively

in an analysis of industry rivalry.

Exit barriers often stem from sunk costs, such as when firms have obligations that they must meet whether or not they cease operations. Examples of such obligations include labor agreements and commitments to purchase raw materials. Because these costs are effectively sunk, the marginal cost of remaining in operation is low