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Product differentiation and industrial structure

TL;DR: In this article, the relationship between advertising, R&D, and market structure has been investigated in the context of vertical product differentiation, and a simple unified framework within which to reexplore many issues that arise in considering the relationship.
Abstract: Some recent literature on "vertical product differentiation" has d eveloped the idea that if the nature of technology and tastes in some industry take a certain form, then the industry must necessarily be "concentrated" and must remain so, no matter how large the economy becomes. The present paper develops this idea further and looks at so me of its implications. This approach offers a simple unified framewo rk within which to reexplore many issues that arise in considering th e relationship between advertising, R&D, and market structure. Copyright 1987 by Blackwell Publishing Ltd.
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Posted Content
TL;DR: In this article, a model emphasizing differences in firm innovative capabilities and the importance of firm size in appropriating the returns from innovation is developed to explain the regularities concerning how entry, exit, market structure, and innovation vary from the birth of technologically progressive industries through maturity.
Abstract: Regularities concerning how entry, exit, market structure, and innovation vary from the birth of technologically progressive industries through maturity are summarized. A model emphasizing differences in firm innovative capabilities and the importance of firm size in appropriating the returns from innovation is developed to explain the regularities. The model also explains regularities regarding the relationship within industries between firm size and firm innovative effort, innovative productivity, cost, and profitability. It predicts that over time firms devote more effort to process innovation but the number of firms and the rate and diversity of product innovation eventually wither.

2,520 citations

Journal ArticleDOI
TL;DR: In this article, a simple model based on the idea of R&D cost spreading was proposed to explain the prior findings about the relationship between the propensity to perform research and the size of a firm.
Abstract: Numerous studies have shown that, within industries, the propensity to perform R&D and the amount of R&D conducted by performers are closely related to the size of the firm, while R&D productivity declines with firm size. These findings have been widely interpreted to indicate that there is no advantage to large firm size in conducting R&D. The authors show how a simple model based on the idea of R&D cost spreading can explain the prior findings about the R&D-firm size relationship, as well as additional features of the R&D-firm size relationship, implying an advantage to large size in R&D.

1,282 citations

Posted ContentDOI
TL;DR: A comprehensive survey of the economic analysis of advertising can be found in this article, with a focus on positive and normative theories of monopoly advertising, price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry.
Abstract: This chapter offers a comprehensive survey of the economic analysis of advertising. A first objective is to organize the literature in a manner that clarifies what is known. A second objective is to clarify how this knowledge has been obtained. The chapter begins with a discussion of the key initial writings that are associated with the persuasive, informative and complementary views of advertising. Next, work that characterizes empirical regularities between advertising and other variables is considered. Much of this work is conducted at the inter-industry level but important industry studies are also discussed. The chapter then offers several sections that summarize formal economic theories of advertising. In particular, respective sections are devoted to positive and normative theories of monopoly advertising, theories of price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry. At this point, the chapter considers the empirical support for the formal economic theories of advertising. A summary is provided of empirical work that evaluates the predictions of recent theories of advertising, including work that specifies and estimates explicitly structural models of firm and consumer conduct. This work is characterized by the use of industry (or brand) and even household-level data. The chapter then considers work on endogenous and exogenous sunk cost industries. At a methodological level, this work is integrative in nature: it develops new theory that delivers a few robust predictions, and it then explores the empirical relevance of these predictions at both inter-industry and industry levels. Finally, the chapter considers new directions and other topics. Here, recent work on advertising and media markets is discussed, and research on behavioral economics and neuroeconomics is also featured. A final section offers some concluding thoughts.

924 citations

Journal ArticleDOI
TL;DR: The authors study how firms differ from their competitors using new time-varying measures of product similarity based on text-based analysis of firm 10-K product descriptions and find evidence that firm R&D and advertising are associated with subsequent differentiation from competitors.
Abstract: We study how firms differ from their competitors using new time-varying measures of product similarity based on text-based analysis of firm 10-K product descriptions. This year-by-year set of product similarity measures allows us to generate a new set of industries in which firms can have their own distinct set of competitors. Our new sets of competitors explain specific discussion of high competition, rivals identified by managers as peer firms, and changes to industry competitors following exogenous industry shocks. We also find evidence that firm R&D and advertising are associated with subsequent differentiation from competitors, consistent with theories of endogenous product differentiation.

735 citations

Book
01 Jan 1998
TL;DR: In this paper, the authors re-examine the relationship between the R&D intensity of an industry and its level of concentration, from the perspective of the Bounds approach to market structure.
Abstract: This paper re-examines the relationship between the R&D intensity of an industry and its level of concentration, from the perspective of the Bounds approach to market structure. In so doing, it proposes an index which summarises those aspects of technology and tastes that are relevant to the determination of a lower bound to concentration.

715 citations

References
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Journal ArticleDOI
TL;DR: In this paper, the authors present a very particular model of a market equilibrium in which two potential entrants will choose to enter the industry, and both will make positive profits, and they will choose both the specification of their respective products, and their prices.
Abstract: Central to the problem of providing adequate foundations for the analysis of monopolistic competition, is the problem of describing market equilibria in which firms choose both the specification of their respective products, and their prices. The present paper is concerned with a-very particular-model of such a market equilibrium. In this equilibrium, exactly two potential entrants will choose to enter the industry; they will choose to produce differentiated products; and both will make positive profits.

2,069 citations

Journal ArticleDOI
TL;DR: In this article, the authors show that the so-called principle of minimum differentiation, as based on Hotelling's 1929 celebrated paper (Hotelling [3]), is invalid and that no equilibrium price solution will exist when both sellers are not far enough from each other.
Abstract: The purpose of this note is to show that the so-called Principle of Minimum Differentiation, as based on Hotelling’s 1929 paper “Stability in Competition” is invalid. The purpose of this note is to show that the so-called Principle of Minimum Differentiation, as based on Hotelling’s 1929 celebrated paper (Hotelling [3]), is invalid. Firstly, we assert that, contrary to the statement formulated by Hotelling in his model, nothing can be said about the tendency of both sellers to agglomerate at the center of the market. The reason is that no equilibrium price solution will exist when both sellers are not far enough from each other. Secondly, we consider a slightly modified version of Hotelling’s example, for which there exists a price equilibrium solution everywhere. We show however that, for this version, there is a tendency for both sellers to maximize their differentiation. This example thus constitutes a counterexample to Hotelling’s conclusions. We shall first recall Hotelling’s model and notations. On a line of length `, two sellers A and B of a homogeneous product, with zero production cost, are located at respective distances a and b from the ends of this line (a+ b ≤ `; a ≥ 0, b ≥ 0). Customers are evenly distributed along the line, and each customer consumes exactly a single unit of this commodity per unit of time, irrespective of its price. Since the product is homogeneous, a customer will buy from the seller Econometrica, 47(5), 1145–1150, September 1979. Center for Operations Research and Econometrics

1,911 citations


"Product differentiation and industr..." refers background in this paper

  • ...8 See for instance d'Aspremont, Jaskold Gabszewicz and Thisse (1979), Neven (1985)....

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  • ...8 See for instance d'Aspremont, Jaskold Gabszewicz and Thisse (1979), Neven (1985). It may be worth noting that a formulation in which firms choose price and location simultaneously is much more problematic....

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Journal ArticleDOI
TL;DR: In this article, the authors present an analysis of the ready-to-eat breakfast cereal industry based on and related to the current antitrust case involving its leading producers, using a spatial competition comparison framework with brands assumed relatively immobile.
Abstract: This paper presents an analysis of the ready-to-eat breakfast cereal industry based on and related to the current antitrust case involving its leading producers. A spatial competition comparison framework is employed, with brands assumed relatively immobile. It is argued that the industry's conduct, in which price competition is avoided and rivalry focuses on new brand introductions, tends to deter entry and protect profits. Entry into a new segment of the market in the 1970s is discussed. Relevant welfare-theoretic issues are analyzed, and it is argued that the remedy proposed by the FTC is likely to improve performance.

918 citations

Journal ArticleDOI
TL;DR: An ordered logit specification for use on ranked individual data is used to analyze survey data on potential consumer demand for electric cars, and results indicate considerable dispersion in individual coefficients.

822 citations

Journal ArticleDOI
TL;DR: In this paper, the authors construct a descriptive model of a market with differentiated consumers and products in which both prices and product specifications are endogenous and in which entry is endogenous and sequential.
Abstract: This article constructs a descriptive model of a market with differentiated consumers and products in which both prices and product specifications are endogenous and in which entry is endogenous and sequential. We show that there is a unique equilibrium in product specifications and prices in which firms will charge different prices and produce products with different characteristics to meet the diverse preferences of consumers. Fixed costs together with free sequential entry imply that there are product choice strategies by which existing firms can effectively deter entry and thus secure positive profits.

193 citations