Wednesday, March 31, 2010

Exit

In class, I talk about firms exiting a market, and show the obvious condition that if long-run economic profits are negative, firms make a rational choice to exit. I typically tell the story as the entire firm leaves the market when economic profits are negative - such as Skybus airline in 2008 - and have discussed this on this blog from the vantage point of the Pacific salmon fishing industry and bars in downtown Iowa City.

Yet, the basic idea of exiting does not have to be so drastic. Firms can use the idea of long-run economic losses in terms of various products or various geographic markets.

Here are some examples of each:

Exiting from a product, but not the entire industry

In 2009, Condé Nast announced that it was exiting from four magazines it published, but not the entire magazine publishing industry.

Exiting from an entire product, but not going out of business

In 2009, Procter and Gamble was looking to get out of the pharmaceutical business.

Exiting from a geographic market

In 2009, McDonald's announced that it was exiting from Iceland. From reading the article, while McDonald's is exiting, the current franchise owner is not exiting from the restaurant business, but re-branding those restaurants and selling more locally sourced meals.

In 2009, Max Factor exited from the US. From reading the article it seems that P&G is strategically exiting to devote more resources to more profitable brands.

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