Thursday, April 2, 2009

Entry in the Market for Vodka

One of the topics discussed in Prin. of Micro is that in the long-run firms enter with economic profits are positive and firms exit (leave the market as opposed to temporarily stop selling) when firms are making economic losses. In an interesting article about the vodka market - we see that "... nearly 260 vodka brands were introduced in the U.S. from 2001 to 2006". The reason - you guessed it - increased demand with sales of distilled spirits increasing from 2000 to 2005, and that vodka has the highest annual growth rate among rum, bourbon, scotch, liqueurs and gin. Grey Goose has the largest annual growth rate among vodka's at just over 50% over the 2000 to 2005 time period. It being sold for $2 billion also has send a strong signal to potential entrants.

While the article focuses on attempts at marketing a new vodka brand, it is clear that profitability in the vodka market is above average, and this higher than average profitability is causing new brands to enter.

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