The following appeared in a memo from the marketing director of "Bargain Brand" Cereals. One year ago we introduced our first product, "Bargain Brand" breakfast cereal. Our very low prices quickly drew many customers away from the top-selling cereal compa

In this memo the marketing director of Bargain Brand Cereal claims that the company will continue to make a profit from sales of its cereal, and therefore that the company should expand its bargain-priced product line to include other foods as well. To support these assertions, the memo points out that Bargain Brand is still earning a profit from its cereal sales, despite the fact that major competitors have lowered their cereal prices and plan to offer bargain-priced cereal brands. On several grounds, this evidence lends little credible support for the memo's conclusions.

First of all, the mere fact that Bargain Brand is still earning a profit from its cereal sales is not the key in determining whether its competitors are succeeding. The key instead is the extent to which Bargain Brand profits have diminished since other companies lowered their cereal prices. It is entirely possible that Bargain Brand has been less profitable since its competitors lowered their cereal prices, and that given a little more time these competitors will draw enough additional sales away from Bargain Brand to render it unprofitable. The fact that the other companies offer the "top brands" is strong evidence that these companies can survive a prolonged price war and ultimately prevail over Bargain Brand.

Secondly, the memo states that several major competitors plan to offer their own special bargain brands to compete directly with Bargain Brand. Yet the memo fails to account for this fact m concluding that Bargain Brand will continue to be profitable. In all likelihood, after the introduction of competing brands Bargain Brand's profits will diminish even further. Without providing evidence that this will not occur, the director cannot convincingly conclude that Bargain Brand will continue to profit from its cereal sales.

Thirdly, based on the fact that Bargain Brand continues to profit from cereal sales, the memo concludes that Bargain Brand should expand its product line to include other food products. Yet the memo provides no evidence that Bargain Brand is likely to be profitable in other markets. Common sense suggests the contrary--that Bargain Brand is unlikely to succeed in markets in which it has no previous experience or exposure. Without providing evidence as to how Bargain Brand would overcome natural barriers to entry into other markets, the director's conclusion is weak at best.

In conclusion, the memo is unpersuasive as it stands. To strengthen the argument, the director must show that Bargain Brand will continue to profit from cereal sales even after its major competitors introduce their own bargain brands. To better assess the director's conclusion that Bargain Brand should expand its line of bargain-priced foods, we would need more information about the extent of competition and other barriers to entry in those other markets.