A Product's Life Cycle
How market conditions vary at different stages in a product's life
Will a monopoly always remain a monopoly? Could a firm in a highly competitive
industry ever gain market power and become a price setter?
Markets are frequently in a state of change. These changes often reflect the stages in
the life of a product. Indeed, many products go through a ‘life cycle': (1) being
launched; (2) rapid growth in sales; (3) ‘maturity', as sales level off; finally (4)
‘decline', as sales begin to fall as the market becomes saturated or as the product
becomes out of date.
Black and white televisions, vinyl gramophone records and audio cassettes have all
reached stage 4. Colour televisions, automatic washing machines and CDs have
reached stage 3. MP3 players, iPods and flat screen TVs are probably still in stage 2.
Some newer electronic products, such as eReaders and Smartphones are probably still
in stage 1.
Question
1. Can you think of any possible new products soon to reach stage 1? If so you could
make your fortune!
At each stage the firm is likely to be faced with quite different market conditions: not
only in terms of consumer demand, but also in terms of competition from rivals.
1. The launch stage
In this stage the firm will probably have a monopoly, (unless there is a simultaneous
launch by rivals).
Given the lack of substitutes, the firm may be able to charge very high prices and
make large profits. This will be especially true if it is a radically new product - like
the ball-point pen, the pocket calculator and the home computer were. Such products
are likely to have a rapidly expanding and price-inelastic demand.
The danger of a high price policy is that the resulting high profits may tempt
competitors to break into the industry, even if barriers are quite high. As an
alternative, then, the firm may go for maximum ‘market penetration’: keeping the
price low to get as many sales and as much brand loyalty as possible, before rivals can
become established.
Which policy the firm adopts will depend on its assessment of its current price
elasticity of demand and the likelihood of an early entry by rivals.
2. The growth stage
Unless entry barriers are very high, the rapid growth in sales will attract new firms.
The industry becomes oligopolistic.
Despite the growth in the number of firms, sales are expanding so rapidly that all
firms can increase their sales. Some price competition may emerge, but it is unlikely
to be intense at this stage. New entrants may choose to compete in terms of minor
product differences while following the price lead set by the original firm.
3. The maturity stage
Now the market has grown large there are many firms competing. New firms – or,
more likely, firms diversifying across into this market – will be entering to get ‘a
piece of the action'. At the same time the growth in sales is slowing down.
Competition is now likely to be more intense and collusion may well begin to break
down. Pricing policy may become more aggressive as businesses attempt to hold on to
their market share. Price wars may break out, only to be followed later by a ‘truce'
and a degree of price collusion.
It is in this stage particularly that firms may invest considerably in product innovation
in order to ‘breathe new life' into old products, especially if there is competition from
new types of product.
4. The decline stage
Eventually, as the market becomes saturated, or as new superior alternative products
are launched, sales will start to fall. For example, once most households had a fridge,
the demand for fridges fell back as people simply bought them to replace worn-out
ones, or to obtain a more up-to-date one.
Initially in this stage, competition is likely to be intense. All sorts of price offers,
extended guarantees, better after-sales service, added features, etc, will be introduced
as firms seek to maintain their sales. Some firms may be driven out of the market,
unable to survive the competition.
After a time, however, the level of sales may stop falling. Provided the product has
not become obsolete, people still need replacements. This is illustrated by line b in the
diagram. The market may thus return to a stable oligopoly with a high degree of tacit
price collusion.
Alternatively the product becomes obsolete (line a), and sales dry up. Firms will leave
the market. It is pointless trying to compete.
Questions
2. In what stages of their life cycle are the following products?: Typewriters; satellite
navigation systems; coal; clockwork watches; jeans; hybrid cars; bicycles. Why might
products have a ‘rebirth'? What would the chart of their life cycle look like?
3. What alternatives are open to a firm which finds its product moving into stage 4?
How does this apply to the products listed above that have reached stage 4 or are
about to?