IDEAS home Printed from https://ideas.repec.org/a/bla/jemstr/v5y1996i2p175-193.html
   My bibliography  Save this article

The Interactive Effect of Product Differentiation and Cost Variability on Profit

Author

Listed:
  • Myong‐Hun Chang
  • Joseph E. Harrington

Abstract

It is generally believed that industries with greater product differentiation have higher rates of return. This paper shows that this effect breaks down in the presence of firm‐specific cost shocks. Greater substitutability in products generates two opposing effects: (1) it allows a larger increase in demand when a firm has a favorable cost shock, which more than compensates for the reduction in demand when it has an unfavorable cost shock, and (2) it results in more intense price competition. These two countervailing forces result in industry profit being highest in markets with a moderate degree of product differentiation.

Suggested Citation

  • Myong‐Hun Chang & Joseph E. Harrington, 1996. "The Interactive Effect of Product Differentiation and Cost Variability on Profit," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 175-193, June.
    • Handle: RePEc:bla:jemstr:v:5:y:1996:i:2:p:175-193
    DOI: 10.1111/j.1430-9134.1996.00175.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1430-9134.1996.00175.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1430-9134.1996.00175.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Klemperer, Paul, 1992. "Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive," American Economic Review, American Economic Association, vol. 82(4), pages 740-755, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richard Friberg & Mark Sanctuary, 2020. "Exchange rate risk and the skill composition of labor," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(2), pages 287-312, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrew Rhodes & Jidong Zhou, 2019. "Consumer Search and Retail Market Structure," Management Science, INFORMS, vol. 67(6), pages 2607-2623, June.
    2. Madden, Paul, 2006. "Geographical separation of oligopolists can be very competitive," European Economic Review, Elsevier, vol. 50(7), pages 1709-1728, October.
    3. Elizabeth L. Rose & Kiyohiko Ito, 2009. "Past Interactions and New Foreign Direct Investment Location Decisions," Management International Review, Springer, vol. 49(5), pages 641-669, October.
    4. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    5. Yunchuan Liu & Tony Haitao Cui, 2010. "The Length of Product Line in Distribution Channels," Marketing Science, INFORMS, vol. 29(3), pages 474-482, 05-06.
    6. Blanchard, Pierre & Gaigné, Carl & Mathieu, Claude, 2012. "Trade costs and international strategy of firms: The role of endogenous product differentiation," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1023-1036.
    7. Eckel, Carsten & Iacovone, Leonardo & Javorcik, Beata & Neary, J. Peter, 2015. "Multi-product firms at home and away: Cost- versus quality-based competence," Journal of International Economics, Elsevier, vol. 95(2), pages 216-232.
    8. Zheyin (Jane) Gu & Giri K. Tayi, 2015. "Research Note—Investigating Firm Strategies on Offering Consumer-Customizable Products," Information Systems Research, INFORMS, vol. 26(2), pages 456-468, June.
    9. Chisholm, Darlene C. & Norman, George, 2012. "Market access and competition in product lines," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 429-435.
    10. Lahmandi-Ayed, Rim, 2010. "Spatial differentiation, divisible consumption and the pro-competitive effect of income," Journal of Mathematical Economics, Elsevier, vol. 46(1), pages 71-85, January.
    11. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, September.
    12. Nicolaj Siggelkow, 2003. "Why Focus? A Study Of Intra‐Industry Focus Effects," Journal of Industrial Economics, Wiley Blackwell, vol. 51(2), pages 121-150, June.
    13. Ayd{i}n Alptekinou{g}lu & Charles J. Corbett, 2008. "Mass Customization vs. Mass Production: Variety and Price Competition," Manufacturing & Service Operations Management, INFORMS, vol. 10(2), pages 204-217, August.
    14. Chamorro-Rivas, Jose-Maria, 2000. "Plant proliferation in a spatial model of Cournot competition," Regional Science and Urban Economics, Elsevier, vol. 30(5), pages 507-518, September.
    15. Alexei Alexandrov, 2008. "Fat Products," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 67-95, March.
      • Alexei Alexandrov, 2006. "Fat Products," Discussion Papers 1435, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    16. Goddard, Ellen W. & Shank, Benjamin & Panter, Chris & Nilsson, Tomas K.H. & Cash, Sean B., 2007. "Canadian Chicken Industry: Consumer Preferences, Industry Structure and Producer Benefits from Investment in Research and Advertising," Project Report Series 52088, University of Alberta, Department of Resource Economics and Environmental Sociology.
    17. Heimeshoff, Ulrich & Klein, Gordon J., 2013. "Bargaining power and local heroes," DICE Discussion Papers 87, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    18. Ushchev, Philip & Sloev, Igor & Thisse, Jacques-François, 2015. "Do we go shopping downtown or in the ‘burbs?," Journal of Urban Economics, Elsevier, vol. 85(C), pages 1-15.
    19. Tim Burnett, 2014. "The Impact of Service Bundling on Consumer Switching Behaviour: Evidence from UK Communication Markets," The Centre for Market and Public Organisation 14/321, The Centre for Market and Public Organisation, University of Bristol, UK.
    20. Thomas N Hubbard & Luis Garicano, 2003. "Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms," Working Papers 03-13, Center for Economic Studies, U.S. Census Bureau.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jemstr:v:5:y:1996:i:2:p:175-193. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.kellogg.northwestern.edu/research/journals/JEMS/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.