Degree Of Product Differentiation Research Articles

A note on the stability of collusion in differentiated oligopolies

Stability of collusion in differentiated oligopolies is studied without symmetry restrictions on the available strategies. It is demonstrated that if the number of firms is sufficiently large, two-phase stick-and-carrot punishment schemes apply at the highest possible discount rate with respect to collusion on the joint profit-maximizing output. If stick-and-carrot punishment schemes are used, collusive stability of the joint profit-maximizing output improves monotonically with the degree of product differentiation. The conclusions contrast with those obtained by Wernerfelt [Economics Lett. 29 (1989) 303].

Licensing the market for technology

In technology-based industries, incumbent firms often license their technology to potential competitors. Such a strategy is difficult to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the assumption of a monopolist technology holder. Competition in the market for technology induces licensing of innovations and incumbent firms may find it privately profitable to license although their joint profits may well be higher in the absence of any licensing. A strong testable implication of our model is that the number of licenses per patent holder decreases with the degree of product differentiation.

Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly

We study the evolution of prices set by duopolists who are uncertain about the perceived degree of product differentiation. Customers sometimes view the products as close substitutes, sometimes as highly differentiated. As the informativeness of the quantities sold increases with the price differential, there is scope for active learning by firms. When information has low value to the firms, they charge the same price as would be set by myopic players, and there is no price dispersion. When firms value information more highly, on the other hand, they actively learn by creating price dispersion. Such price dispersion arises in a cyclical fashion, and is most likely to be observed when the firms' environment changes sufficiently often, but not too frequently. Firms' payoffs are higher when they use correlated pricing strategies. Contrary to what one might expect, such coordination need not hurt consumers, provided they are sufficiently impatient.

Product Differentiation and Capacity Cost Interaction in Time and Price Sensitive Markets

In this paper, we study a profit-maximizing firm selling two substitutable products in a price and time sensitive market. The products differ only in their prices and delivery times. We assume that there are dedicated capacities for each product and that there is a standard industry delivery time for the regular (slower) product. The objective of the firm is to determine the delivery time of the express (faster) product and appropriately price the two products, taking into consideration the impact of delivery time reduction on capacity requirements and costs. We develop a model that integrates pricing and delivery time decisions with capacity requirements and costs, and study scenarios where the firm is constrained in capacity for none, one, or both product(s). We show how product differentiation decisions are influenced by capacity costs, and how the firm should adapt its differentiation strategy in response to a change in its operating dynamics. We first identify a market characteristic that governs the optimal pricing structure. We then show that the degree of product differentiation depends on both the absolute, as well as the relative values of the capacity costs. Provided that the capacity cost differential remains the same, higher capacity costs induce less time differentiation and less price differentiation. An increase in capacity cost differential increases price differentiation, but decreases time differentiation. The optimal prices depend, in addition to the above, on the market characteristic. We find that prices can actually decrease when the firm incurs capacity-related costs. We also explore the impact of substitutability on product differentiation, and illustrate our results in a numerical study.

How do family strategies affect fund performance? When performance-maximization is not the only game in town

This is a first attempt to study how the structure of the industry affects mutual fund behavior. I show that industry structure matters; the mutual fund families employ strategies that rely on the heterogeneity of the investors in terms of investment horizon by offering the possibility to switch across different funds belonging to the same family at no cost. I argue that this option acts as an externality for all the funds belonging to the same family, affecting the target level of performance the family wants to reach and the number of funds it wants to set up. By using the universe of the U.S. mutual fund industry, I empirically confirm this intuition. I find evidence of family driven heterogeneity among funds and show that families actively exploit it. I argue that the more families are able to differentiate themselves in terms of non-performance-related characteristics, the less they need to compete in terms of performance. Product differentiation—i.e., the dispersion in the “services” (fees, performance) that the competing funds offer—affects performance and fund proliferation. In particular, I show that the degree of product differentiation negatively affects performance and positively affects fund proliferation.

Adoption of Product and Process Innovations in Differentiated Markets: The Impact of Competition

The paper examines the effects of the degree of competition on the firms' decision to innovate in differentiated markets. We find that a low (high) degree of product differentiation (competition) weakly supports the introduction of new products. Firms' weakly favour a process innovation if the degree of product differentiation (competition) is high (low). In addition, assumptions on the strategic complementarity of product and process innovations and on the decreasing returns of a product innovation are found to be the critical assumptions in the sense of Milgrom and Roberts (1994).

The nature and determinants of the economic currency exposure of non‐financial UK firms

This study examines the sensitivity of sales, profit margins and input costs to exchange rate movements for non‐financial, UK firms. The sample is a representative cross‐section of larger, publicly‐listed firms and is not limited to those directly involved in international trade. Surveyed firms provided data on both the direct and indirect components of economic exposure. As with other studies, we find a statistically significant relationship between a firm’s exchange rate sensitivity and the degree to which it sells, sources, or funds itself internationally. Contrary to the theory on economic exposure, only one indirect determinant, that for foreign‐based competition, is unambiguously significant. The other indirect effects, the degree of product differentiation, the demand elasticity for a firm’s output, and common input currencies for competitors, are not significant in our models. Our examination of the interactive effects suggested by the theory of economic exposure shows no statistical relationship to a firm’s exchange rate sensitivity. We attribute the weak evidence for competitive effects to the complexities of the indirect determinants of economic exposure at the firm‐specific level.

Market competition and strike activity

We develop a model of wage bargaining with private information in a duopoly. We investigate how product differentiation and market competition (Bertrand vs. Cournot competition) affect wages and strikes. If bargaining takes place at the industry-level, then both the wage outcome and the strike activity do not depend on the degree of product differentiation whatever the type of market competition. However, if bargaining takes place at the firm-level, then wages and strikes are increasing with the degree of product differentiation, and the strike activity is smaller under Bertrand than under Cournot competition.

Vertical price leadership: A cointegration analysis

AbstractHere we detail a method to test whether or not retailers allow suppliers to set the wholesale price not only on the basis of the costs faced by the suppliers but also on the basis of consumer demand. Using standard theory, long‐run price relationships between the stages in the channel are derived. Next, these static price relationships are imposed on a dynamic model to be tested for cointegration and long‐run noncausality, embedding the hypotheses on vertical price leadership. To derive the testable implications of these hypotheses, we show that the common stochastic trend and long‐run equilibrium error must explicitly be assigned to variables in the channel model. The model is particularly relevant for industries characterized by a low degree of product differentiation. An empirical application to two Dutch marketing channels for food products gives comprehensible results. [EconLit citations: C32, L12, Q11] © 2002 Wiley Periodicals, Inc.

Automatic disassembly plans: Application to the continuous process industries : B. Adnezo-Díaz, Fernando Moure, Manuel Rendueles, v21, n4, 2002, pp276–286

Globalisation has transformed market conditions reducing lead times and increasing both the degree of product differentiation and price competition. To cope with this issue, new hybrid order fulfilment strategies have emerged which integrate the Make to Stock (MTS) and Build to Order (BTO) strategies, and whose aim is to simultaneously improve opposite objectives, such as the stock level and the lead time. Furthermore, companies face frequent challenges of sharing updated information and avoiding the lack of coordination between the different company subsystems. This work focuses on relatively recent fulfilment strategies based on the Floating Decoupling Point (FDP) which uses real time information to operate. The main objectives of this work are the study of the influence of different sources of real-time information about the available products and select the most suitable configuration of these systems, regarding the inventory control policy and the source of real-time information. The stochastic nature of the process makes simulation an appropriate tool to achieve valuable results. The simulation studies have been carried out following a full factorial Design of Experiments (DoE). Experimental results show that the strategies based on the FDP are very sensitive to the real-time information. These systems achieve the best performance when the inventory control policy uses simultaneously demand forecasting and real-time information of available products corresponding to the Work-In-Process (WIP) and Finished Goods Inventory (FGI). In contrast, system performance deteriorates significantly when real-time information of available products in the WIP has not been taken into account.

The effects of antidumping legislation on the degree of product variety and social welfare

Using a simple characteristic space model of monopolistic competition with two interdependent markets, this paper analyses the effects of the bilateral adoption of antidumping measures on the degree of product differentiation, as well as the relationships with the type of product arrangement and the implications for welfare. Under an arrangement where each domestic firm competes directly with two imported products (interleaved arrangement), the model reproduces some of the results that already exist in the literature, where these have been obtained in an oligopolistic context. Through the characterisation of the symmetric zero profit equilibrium, it is shown that under such an arrangement the degree of product variety is higher when governments do not impose bilateral restrictions on prices. By contrast, under an arrangement where each half of the market is made-up of products of the same nationality (split arrangement), the reciprocal imposition of antidumping legislation has no effect on either the degree of product variety or on social welfare.

Product differentiation, process R&D, and the nature of market competition

We investigate the relationship between process and product R&D and compare the incentives for both types of R&D under different modes of market competition (Bertrand versus Cournot). It is shown that: (i) process R&D investments increase with the degree of product differentiation and firms invest more in product R&D when they can do process R&D than when they cannot; (ii) Bertrand firms have a stronger incentive for product R&D whereas Cournot firms invest more in process R&D; and (iii) cooperation in product R&D promotes both types of R&D relative to competition whereas cooperation in both types of R&D discourages R&D relative to cooperation in just product R&D.

Equilibrium locations in a spatial model with sequential entry in real time

I describe the entry process in a spatial market over an infinite time horizon, with and without uncertainty over the follower’s entry date. I show that the later the follower is expected to enter, the closer to the center of the market the leader locates at the initial date. Therefore, the degree of product differentiation at equilibrium is smaller, the later the follower enters the market.

Product differentiation, competition, and international trade

In this paper the two workhorse theories of international trade under imperfect competition – Krugman’s taste for variety model and Brander’s strategic intra‐industry trade model – are integrated into a single analytical framework. A quadratic utility function allows for a nesting of these two theories by postulating a consumer taste for variety over differentiated products, where the extent of product differentiation is linked to the intensity of strategic interaction among firms. The model yields intuitive predictions on the effects of the degree of product differentiation on the volume of trade and on the composition of the gains from trade under imperfect competition. JEL classification: F12 Différenciation de produits, concurrence et commerce international. Ce mémoire intègre deux théories connues du commerce international en régime de concurrence imparfaite – le modèle du goût pour la variété de Krugman et celui du commerce intra‐industrie de Brander – en un seul cadre analytique. Une fonction d’utilité quadratique permet d’encadrer ces deux théories en postulant que le consommateur a un goût pour la variété dans une gamme de produits différenciés où le degré de différenciation est reliéà l’intensité de l’interaction stratégique entre les entreprises. Le modèle engendre des prévisions quant aux effets du degré de différenciation des produits sur le volume de commerce international et la composition des gains résultant de ce commerce en régime de concurrence imparfaite.

Price and quantity experimentation: A synthesis

This paper compares experimentation about product differentiation in a linear setting under four market structures: quantity-setting and price-setting monopoly, Cournot and Bertrand duopoly. Quantity-setting firms always experiment by raising their quantities and the monopolist experiments relatively more than the duopolists. A price-setting monopolist does not experiment. The value of information to Bertrand duopolists may be positive or negative depending on the degree of product differentiation. When information is valuable, price-setting duopolists experiment by lowering prices. A numerical example indicates that the intensity of experimentation is higher in a Cournot duopoly than in a Bertrand duopoly.

Spatial Competition in the Network Television Industry

We present an empirical study of spatial competition and a methodology to estimate demand for products with unobservable characteristics. Using panel data, we estimate a discrete choice model with latent product attributes and unobserved heterogenous consumer preferences. Our application of the methodology to the network television industry yields estimates that are consistent with experts' views. Given our estimates, we compute Nash equilibria of a product location game, and find that firms' observed strategies (such as the degree of product differentiation) are generally optimal. Discrepancies between actual and optimal strategies reflect the networks' adherence to rules of thumb, and possibly, bounded rationality behavior.

Strategic choices of quality, differentiation and pricing in financial services

Two financial services firms (FSFs) produce information on future returns from risky assets, incorporate this information in a report and sell the reports to investors. The FSFs make strategic choices of the quality, differentiation and prices of their reports. Their optimal strategic choices of quality and differentiation divide the market for the report into three segments. Each FSF has a monopoly in its own segment, and the two compete head-to-head in a duopoly segment. The sizes of the monopoly segments increase with increases in quality and differentiation. An increase in differentiation reduces the size of the duopoly market, while an increase in quality has an ambiguous effect on the duopoly market: for high enough equilibrium differentiation, the size of the duopoly market decreases with an increase in quality. The non-cooperative FSFs pursue niche strategies, each focusing on a different related set of risks, in order to coordinate the contents of their reports to achieve the equilibrium degree of product differentiation. Recent years have seen a worldwide wave of financial-firm mergers and acquisitions. This paper’s model suggests that in equilibrium FSFs differentiate their products and develop profitable niches; in principle, however, sufficiently strong economies of scope could lead to a small number of FSFs with little differentiation that dominate all financial services markets.

Product Differentiation and Upstream‐Downstream Relations

This paper examines the relationship between a differentiated downstream market and a specialized upstream market. We analyze three different types of vertical relation between the upstream and downstream sectors when the upstream market supplies specialized and complementary inputs to a downstream product‐differentiated market. The first is the benchmark case of decentralized markets, the second is a network of alliances among upstream suppliers, and the third is partial vertical integration. We identify the perfect equilibrium for a symmetric model in each case and show that there is no simple relationship between the degree of connection between upstream and downstream firms and profitability. The key factor affecting prices and the relative profitability of the different market organizations is the degree of product differentiation among the downstream firms, because it affects the intensity of competition among upstream suppliers. We show that vertical foreclosure is not an equilibrium strategy.

How should “protection” be evaluated in Article III GATT disputes?

This paper considers the economic analysis of protection in Article III GATT disputes. We first observe that the appropriate measure of protection and the level of protection that is acceptable have hardly been discussed in the case law and that panels tend to presume that a strong substitution between domestic and foreign products always lead to substantial protection. Next, we consider a stylised model of trade and find that the ability to raise price is a robust measure of protection and that protection falls significantly (for a given barrier) with the degree of product differentiation but also with the degree of rivalry. We also observe that the effect of non-tariff barriers on import values is ambiguous, so that imports are not a robust measure of protection. Our findings suggest that the distinction drawn in the case law between “like” and “directly competitive and substitutable” products is not helpful. Finally, we suggest a method to evaluate protection in trade disputes, which is inspired by the definition of the relevant market in antitrust.

Product Differentiation and Upstream-Downstream Relations

This paper examines the relationship between a differentiated downstream market and a specialized upstream market. We analyze three different types of vertical relation between the upstream and downstream sectors when the upstream market supplies specialized and complementary inputs to a downstream product-differentiated market. The first is the benchmark case of decentralized markets, the second is a network of alliances among upstream suppliers, and the third is partial vertical integration. We identify the perfect equilibrium for a symmetric model in each case and show that there is no simple relationship between the degree of connection between upstream and downstream firms and profitability. The key factor affecting prices and the relative profitability of the different market organizations is the degree of product differentiation among the downstream firms, because it affects the intensity of competition among upstream suppliers. We show that vertical foreclosure is not an equilibrium strategy. Copyright (c) 2001 Massachusetts Institute of Technology. (This abstract was borrowed from another version of this item.)