Which of the following terms describes what happens when the introduction of a new product causes the sales of existing products to decrease?
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A. B. C. D. E.E
When the introduction of a new product causes the sales of existing products to decrease, it is called cannibalization.
The correct answer to the question is E. Cannibalization.
Cannibalization refers to a situation in which the introduction of a new product in the market leads to a decrease in sales of existing products within the same company or industry. Essentially, the new product "eats into" the sales of the existing products, hence the term "cannibalization."
When a new product is introduced, it may attract customers who would have otherwise purchased the existing products. As a result, the sales of those existing products decline, and the company may experience a shift in consumer preferences or demand.
Cannibalization can occur for various reasons, such as when the new product offers improved features, better pricing, or greater convenience compared to the existing products. In some cases, companies intentionally introduce new products to cannibalize their own existing products in order to stay competitive or capture a larger market share.
Let's examine the other answer options to understand why they are not the correct choices:
A. Opportunity Cost: Opportunity cost refers to the value of the next best alternative forgone when making a decision. It is not directly related to the decrease in sales of existing products due to the introduction of a new product.
B. Sunk Cost: Sunk cost refers to the cost that has already been incurred and cannot be recovered. It is not directly related to the decrease in sales of existing products due to the introduction of a new product.
C. Externality: Externality refers to the impact of an economic activity on parties who are not directly involved in the activity. While the introduction of a new product may have external effects, it does not directly describe the decrease in sales of existing products.
D. Incremental Cash Flow: Incremental cash flow refers to the difference in cash flows between two alternative courses of action. Although the decrease in sales of existing products may have an impact on cash flows, it does not specifically describe the phenomenon of a new product causing the sales of existing products to decrease.
In summary, cannibalization is the term that describes the decrease in sales of existing products when a new product is introduced, making option E the correct choice.