Instructor-created question Question Help An important example of a firm-created

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Instructor-created question Question Help An important example of a firm-created barrier is brand proliferation. This means that a firm might introduce a few brands of a product. This question demonstrates how brand proliferation serves as an entry barrier. Suppose that the shampoo industry is comprised of only three large firms, each selling one brand of shampoo, and say that 20 percent of all consumers of shampoo change brands in a random fashion every year. If customers who change brands do so randomly, then a new firm entering the industry can expect to pick uppercent of the customers who change brands. (Enter your response rounded to two decimal places.) Thus, the new firm would receivepercent of the total market merely as a result of picking up its share of the random switchers. (Enter your response rounded to two decimal places.) Instead, suppose that the existing three firms each have three brands. Again assuming that customers who change brands do so randomly, a new firm selling one new brand could expect to pick upxXpercent of the brand switchers. (Enter your response rounded to two decimal places.) The new firm would now only receivepercent of the total market as a result of picking up its share of the random switchers. (Enter your response rounded to two decimal places.)

Explanation / Answer

Assume that the shampoo industry has three firms, selling one brand of shampoo, and 20 percent of all consumers of shampoo change brands in a random fashion every year.

If customers who change brands do so randomly, then a new firm entering the industry can expect to pick up 20 percent of the customers who change brands. Total market share before the entry of new firm is 33.33% by each firm for each brand. If one more firm enters, the market share will be 25%.

Thus, the new firm would receive 25 percent of the total market merely as a result of picking up its share of the random switchers.

Instead, suppose that the existing three firms each have three brands. A new firm will now face 10 brands in total and will be selling one new brand. It could expect to pick up 20 percent of the brand switchers. The new firm would now only receive 10 percent of the total market

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