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Product Proliferation: An Empirical Analysis of Product Line Determinants and Market Outcomes

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  • Barry L. Bayus

    (Kenan-Flagler Business School, University of North Carolina, McColl Bldg. CB 3490, Chapel Hill, North Carolina 27599)

  • William P. Putsis, Jr.

    (London Business School, Sussex Place, Regent's Park, London NW1 4SA, United Kingdom)

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    Abstract

    Considering the number of new product introductions and available product varieties today, the practice of product proliferation is visibly evident in many diverse industries. Given its prevalence in practice, understanding the determinants and implications of firm proliferation strategies clearly has important managerial relevance. Previous theoretical research has identified three primary effects of a proliferation strategy: (1) a broad product line can increase the overall demand faced by the firm, (2) a broad product line can affect supply by increasing costs, and (3) broad product lines can have strategic consequences (e.g., long product lines can deter entry, thereby allowing an incumbent firm to raise prices). However, despite the theoretical interest in this common business practice, there has been very little empirical research on this topic. Moreover, no empirical study has simultaneously considered all three of the possible effects associated with a proliferation strategy. Consequently, in this paper we propose a three-equation simultaneous system that captures both the determinants and market outcomes of a firm's product line decisions. In particular, we specify market share, price, and product line length equations, which are estimated by three stage least squares. Using this structure, we empirically study the personal computer industry over the period 1981–1992. Our empirical results demonstrate that proliferation strategies do not have a uni-dimensional explanation. We find that product proliferation decisions have both demand (market share) and supply (price) implications. Our empirical results also suggest that the firm-level net market share impact of product proliferation in the personal computer industry is negative (i.e., the cost increases associated with a broader product line dominate any potential demand increases). As expected, we find that structural competitive factors play an important role in the determinants and market outcomes of a firm's product line decisions. However, we do not find evidence of firms using proliferation strategies to deter entry in this industry. Finally, we also demonstrate that some of the empirical conclusions from previous research are reversed once product line length is specified as endogenous in the share and price specifications.

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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 18 (1999)
    Issue (Month): 2 ()
    Pages: 137-153

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    Handle: RePEc:inm:ormksc:v:18:y:1999:i:2:p:137-153

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    Keywords: Product Proliferation; Product Line Pricing; Entry Deterrence; Personal Computer Industry;

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    Cited by:
    1. Roberto Fontana & Lionel Nesta, 2006. "Product entry in a fast growing industry: the LAN switch market," Journal of Evolutionary Economics, Springer, vol. 16(1), pages 45-64, April.
    2. Kai-Lung HUI, 2002. "Product Variety under Brand Influence: An Empirical Investigation of Personal Computer Demand," Industrial Organization 0205004, EconWPA, revised 13 Dec 2002.
    3. Kaiser Karen & Schwabe Rainer, 2012. "Preference for Variety," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-32, January.
    4. Christos Genakos, 2004. "DIFFERENTIAL MERGER EFFECTS: The Case of the Personal Computer Industry," STICERD - Economics of Industry Papers 39, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    5. Soon-Yau Foong & Razak Idris, 2012. "Leverage, product diversity and performance of general insurers in Malaysia," Journal of Risk Finance, Emerald Group Publishing, vol. 13(4), pages 347-361.
    6. Deleersnyder, B. & Dekimpe, M.G. & Steenkamp, J-B.E.M. & Koll, O., 2005. "Win-Win Strategies at Discount Stores," ERIM Report Series Research in Management ERS-2005-050-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    7. Maria Salgano, 2006. "Choosing to Have Less Choice," Working Papers 2006.37, Fondazione Eni Enrico Mattei.
    8. Aoki, Katsuki & Staeblein, Thomas & Tomino, Takahiro, 2014. "Monozukuri capability to address product variety: A comparison between Japanese and German automotive makers," International Journal of Production Economics, Elsevier, vol. 147(PB), pages 373-384.
    9. Houghton, Susan M. & Smith, Anne D. & Hood, Jacqueline N., 2009. "The influence of social capital on strategic choice: An examination of the effects of external and internal network relationships on strategic complexity," Journal of Business Research, Elsevier, vol. 62(12), pages 1255-1261, December.
    10. Agarwal, Rajshree & Bayus, Barry L., 2002. "The Market Evolution and Sales Take-Off of Product Innovations," Working Papers 02-0104, University of Illinois at Urbana-Champaign, College of Business.
    11. Trentin, Alessio & Perin, Elisa & Forza, Cipriano, 2012. "Product configurator impact on product quality," International Journal of Production Economics, Elsevier, vol. 135(2), pages 850-859.
    12. Hwang, M. & Bronnenberg, B.J. & Thomadsen, R., 2010. "An empirical analysis of assortment similarities across U.S. supermarkets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3736994, Tilburg University.
    13. Kostas Axarloglou, 2008. "Product line extensions: causes and effects," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 9-21.
    14. Tang, Christopher S., 2010. "A review of marketing-operations interface models: From co-existence to coordination and collaboration," International Journal of Production Economics, Elsevier, vol. 125(1), pages 22-40, May.
    15. Takagoshi, Noritsugu & Matsubayashi, Nobuo, 2013. "Customization competition between branded firms: Continuous extension of product line from core product," European Journal of Operational Research, Elsevier, vol. 225(2), pages 337-352.
    16. Christos D. Genakos, 2004. "Differential merger effects: the case of the personal computer industry," LSE Research Online Documents on Economics 6726, London School of Economics and Political Science, LSE Library.
    17. Antonis Michis & Anna Markidou, 2013. "Determinants of retail wine prices: evidence from Cyprus," Empirical Economics, Springer, vol. 45(1), pages 267-280, August.
    18. Lee, Cheryl Hill & Schluter, Gerald E., 2002. "Why Do Food Manufacturers Introduce New Products?," Journal of Food Distribution Research, Food Distribution Research Society, vol. 33(01), March.
    19. Varadarajan, Rajan, 2009. "Fortune at the bottom of the innovation pyramid: The strategic logic of incremental innovations," Business Horizons, Elsevier, vol. 52(1), pages 21-29.
    20. Richards, Timothy J. & Patterson, Paul M., 2002. "Strategic Interaction With Multiple Tools: A New Empirical Model," Working Papers 28545, Arizona State University, Morrison School of Agribusiness and Resource Management.
    21. Han, Chaodong & Porterfield, Tobin & Li, Xiaolin, 2012. "Impact of industry competition on contract manufacturing: An empirical study of U.S. manufacturers," International Journal of Production Economics, Elsevier, vol. 138(1), pages 159-169.

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