How do name-brand products compete with their generic competitors?

By Andrew Beattie AAA
A:

On April 2, 1993, Phillip Morris announced that it was cutting the price of its cigarettes to compete with the growing number of generic brands selling for much less. The announcement had an almost immediate effect on the company; its stock plunged 26% in a single day and its market cap shrunk by $10 billion.

Generic cigarettes had been eating away at the Marlboro market share for years, so the move by Phillip Morris was based on sound reasoning. Phillip Morris was betting that its brand recognition, a big part of its formerly impenetrable economic moat, was strong enough to sway consumers who were given the choice of two similarly priced products. Simply put, Phillip Morris assumed most people would choose Marlboro over a similarly priced generic brand.

Despite the sharp drop in its stock price, Philip Morris proved to be right in its pricing strategy. Its quintessential air pocket stock recovered value over the next two years. The strategy behind Marlboro Friday was mimicked by many other established brands during the "generic versus brand" price wars of the 1990s. In almost every case, the brand carried the day. For contrarian investors who recognized the strength of the Philip Morris brand and bought in after the drop, Marlboro Friday was one of the nicest pieces of news of the 1990s.

(For more on this topic, read Economic Moats Keep Competitors at Bay and Competitive Advantage Counts.)

This question was answered by Andrew Beattie.

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