Abstract:
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This article studies how product introduction decisions relate to profitability
and uncertainty in the context of multi-product firms and product differentiation.
These two features, common to many modern industries, have not received much
attention in the literature as compared to the classical problem of firm entry, even
if the determinants of firm and product entry are quite different. The theoretical
predictions about the sign of the impact of uncertainty on product entry are not
conclusive. Therefore, an econometric model relating firms’ product introduction
decisions with profitability and profit uncertainty is proposed. Firm’s estimated
profits are obtained from a structural model of product demand and supply, and
uncertainty is proxied by profits’ variance. The empirical analysis is carried out
using data on the Spanish car industry for the period 1990-2000. The results show a
positive relationship between product introduction and profitability, and a negative
one with respect to profit variability. Interestingly, the degree of uncertainty appears
to be a driving force of entry stronger than profitability, suggesting that the product
proliferation process in the Spanish car market may have been mainly a consequence
of lower uncertainty rather than the result of having a more profitable market.
Keywords: Product introduction, entry, uncertainty, multiproduct firms, automobile
JEL codes: L11, L13 |