When a firm introduces a new product or service into a market where there is little scope for further growth, that product or service will either eat into the share of the market’s existing products or swiftly disappear from sight. If some of the existing products are manufactured by the firm that is introducing the new product, then the newcomers will cannibalise the old timers; that is, they will eat into the market share of their own kind. For example, it has been estimated that two-thirds of the sales of Gillette’s Sensor razor came from consumers who would otherwise have been customers for the company’s other razors. Likewise for the company’s later blades – they provide cut-throat competition for each other.
There are sound reasons for firms to want to do such a seemingly stupid thing. In the first place, they may need to keep ahead of the competition. In the chocolate-bar market in the UK, for instance, the decline in Kit Kat’s share was arrested by the launch of a new, more chunky bar, which undoubtedly cannibalised the market for the original. Its appeal was to all those people who buy chocolate bars, including those who bought the old Kit Kat.
Firms may also choose to cannibalise their own products by producing marginally improved products. The idea is to persuade existing customers to purchase an upgraded version. This is true of the PC market, for example, where Intel’s newest, most powerful processor cannibalises the last generation of Intel processors, but in the interests of arresting decline in the total market.
Economists sometimes distinguish between planned and unplanned cannibalisation. Planned cannibalisation is an anticipated loss in sales of an existing product as a result of the introduction of a new product in the same line. In the unplanned version, the loss of sales from an established product to a more recently introduced one is unexpected.
Historically, firms have found
it hard to cannibalise their own products. They try to hang on to declining market shares for too long before deciding to introduce new products that compete with their own. Kodak, for example, refused for years to introduce the 35mm camera for fear of cannibalising its older products.
The Internet presents many firms with difficult decisions about cannibalisation. Travel agents, for instance, have to decide whether to offer online services at a fraction of the cost of their traditional branch-based services in order to compete with airlines and other firms that have begun to sell to customers via direct online links. Publishers have to decide how much material (and at what price) to make available electronically. For all of them there is a real danger that their online material will cannibalise sales of their traditional printed material.
Deregulation also presented companies with difficult dilemmas about cannibalising products and services that had thrived for years in protected markets. In the airline business, for example, traditional national carriers were faced with feisty, low-cost new entrants. In response, British Airways for one introduced its own low-cost airline, called Go (which it sold in 2002). It competed not only with the new entrants but also (in a carefully controlled way) with BA itself.