Cannibalisation occurs when a company reduces the sales of one of its products by introducing a similar, competing product in the same market.
Igami and Yang study this phenomenon in relation to burger outlets, pointing out that entry of new outlets harms the profitability of existing stores (cannibalisation) but that this occurs so as to preempt the threat of rivals’ entry: i.e. a firm may have an incentive to cannibalise its market share if it thinks this will keep rivals out (by saturating the market and depriving it of store locations).
One of their main findings is that “shops of the same chains compete more intensely with each other than with shops of different chains, which implies cannibalization is one of the most important considerations for the firms’ entry decisions”. A policy conclusion of this would be that a firm should invest in multiple brands such that it can monopolise a geographic area without suffering the effects of cannibalisation.
Thomasden estimates that only shops within about 0.5 miles are considered close-substitutes, despite the car-obsessed nature of society today.
Kitamura and Shinkai find that unless the market has goods that are extremely differentiated, or extremely similar in terms of quality then cannibalisation won’t occur. Suppose we have two firms each producing two goods in the same market: a low quality good (A) and a high quality good (B), where the high quality good imposes higher production costs but also higher utility for the consumer. If there is a large difference in quality between good A and B then consumers prefer good B (they derive higher utility) and so both firms have greater incentive to supply more of this good, driving product A out of the market. Conversely when there is not a lot of difference between the two goods then the firms have an incentive to supply good A (as this is cheaper to produce), thereby driving good B out of the market.