Digital Technology-Enabled Product Proliferation Strategy

Abstract

We examine the impact of digital technology on product proliferation. We theorize that as firms digitize their products, they will increase the number of products in their existing product categories. We expect the level of proliferation is greater among firms that have higher marginal cost of production and face more binding distribution constraint in the physical product channel. We also predict greater proliferation in product categories that have higher customer preference heterogeneity. Evidence from the Amazon Kindle e-book ecosystem supports our hypotheses. Additional analyses on the proliferation strategy implementation reveal that firms tend to introduce new products that require research and development investment as opposed to unbundling their existing products, a finding that suggests the firms’ strategic intent behind the proliferation activities is not just to take advantage of the digital technology efficiencies, but also to shift the source of differentiation advantage from physical product attributes to intellectual contents. Our study contributes to the literature by showing how firms adjust and execute their differentiation strategy in the digital age.