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.

RELATED FAQS
  1. How does the market share of a few companies affect the Herfindahl-Hirschman Index ...

    In economics and commercial law, the Herfindahl-Hirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >>
  2. How does automated work affect structural unemployment rates?

    One of the main causes of structural unemployment is the automation of work. If jobs become increasingly automated, more ... Read Full Answer >>
  3. What is the difference between economies of scope and economies of scale?

    Economies of scope and economies of scale are two different economic concepts used to help cut a company's cost. Economies ... Read Full Answer >>
  4. How is productivity calculated?

    Productivity measures the efficiency of a company's production process. It is calculated by dividing the outputs produced ... Read Full Answer >>
  5. What is the role of agency theory in corporate governance?

    Agency theory is used to understand the relationships between agents and principals. The agent represents the principal in ... Read Full Answer >>
  6. What's the difference between agency theory and stakeholder theory?

    Agency theory and stakeholder theory are both used to understand and explain various types of relationships in business. ... Read Full Answer >>
Related Articles
  1. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  2. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  3. Professionals

    How Agile Principles Are Used in Holacracy

    Holacracy itself has been an actively utilized management system since 2007 with its framework rooted in agile methodology.
  4. Personal Finance

    The Top 5 Most Unionized Industries

    Unions don't have the membership numbers that they once did, but they are still a vital part of several different important industries.
  5. Investing

    Has Nepotism Ever Worked?

    It may very well be that hiring a relative is the right course of action for you. But before you do, carefully consider how hiring family could hurt your business.
  6. Investing

    The Right Mindset for CEO Success

    Owning the role of CEO is no simple task so it is imperative that CEOs have the correct mindset to ensure the success of their organization.
  7. Fundamental Analysis

    Calculating the Herfindahl-Hirschman Index (HHI)

    The Herfindhal-Hirschman Index, (HHI) is a measure of market concentration and competition among market participants.
  8. Economics

    Understanding Horizontal Integration

    Horizontal integration is the acquisition or internal creation of related businesses to a company’s current business focus.
  9. Economics

    The Nash Equilibrium

    Nash Equilibrium is a key concept of game theory, which helps explain how people and groups approach complex decisions. Named after renowned mathematician John Nash, the idea of Nash Equilibrium ...
  10. Investing Basics

    The Basics Of A Financial Analysis Report

    Running financial analysis on a company or industry is a key skill every investor must learn and understand how to undertake without which an ineffective financial report and investment recommendation ...
RELATED TERMS
  1. BCG Growth Share Matrix

    A planning tool that uses graphical representations of a company’s ...
  2. Dog

    One of the four categories or quadrants of the BCG Growth-Share ...
  3. Hawthorne Effect

    The inclination of people who are the subjects of an experimental ...
  4. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  5. Organizational Chart

    A diagram that outlines the internal structure of a company. ...
  6. Market Research

    The process of assessing the viability of a new product or service ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!