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. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. Jorge Florez-Acosta & Daniel Herrera-Araujo, 2017. "Multiproduct retailing and buyer power: The effects of product delisting on consumer shopping behavior," PSE Working Papers halshs-01467435, HAL.
    13. Zhijun Chen & Patrick Rey, 2019. "Competitive cross‐subsidization," RAND Journal of Economics, RAND Corporation, vol. 50(3), pages 645-665, September.
    14. Timothy Sorenson, 1999. "Product Location with Foresight," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 14(3), pages 281-292, May.
    15. Horrace, William C. & Huang, Rui & Perloff, Jeffrey M., 2016. "Effects of increased variety on demand, pricing, and welfare," Research in Economics, Elsevier, vol. 70(4), pages 569-587.
    16. José L. Moraga-González & Vaiva Petrikaitė, 2013. "Search costs, demand-side economies, and the incentives to merge under Bertrand competition," RAND Journal of Economics, RAND Corporation, vol. 44(3), pages 391-424, September.
    17. Zhang, Anming & Zhang, Yimin, 1996. "Stability of a Cournot-Nash equilibrium: The multiproduct case," Journal of Mathematical Economics, Elsevier, vol. 26(4), pages 441-462.
    18. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    19. Kuo-Feng Huang & Chwo-Ming Joseph Yu, 2012. "Cross-Regional Patenting," Management International Review, Springer, vol. 52(2), pages 213-231, April.
    20. Manez, J.A. & Waterson, M., 2001. "Multiproduct Firms and Product Differentiation: a Survey," The Warwick Economics Research Paper Series (TWERPS) 594, University of Warwick, Department of Economics.

    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.