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Product Differentiation, Industry Concentration and Market Share Turbulence

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  • Catherine Matraves
  • Laura Rondi

Abstract

Building on the current theory of industrial concentration, we analyze the relation between market size and product differentiation, and show how product differentiation impacts market share turbulence. We first propose that in markets where vertical product differentiation dominates, firms will have an incentive to escalate investment in advertising and/or R&D as market size increases. Secondly, such (firm-specific) investments will make competitive advantage more sustainable as the firm is less imitable. This will not be the case if the market is primarily characterized by homogeneous products or horizontal product differentiation. Our predictions are tested using an original EU dataset for 1987 and 1997. Our results strongly support our predictions - the degree of market share turbulence increases with market size. However, this relation is weakened by competitive investment in advertising and R&D.

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File URL: http://www.tandfonline.com/10.1080/13571510601097124
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 14 (2007)
Issue (Month): 1 ()
Pages: 37-57

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Handle: RePEc:taf:ijecbs:v:14:y:2007:i:1:p:37-57

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Related research

Keywords: Product Differentiation; Market Size; Turbulence;

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References

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Cited by:
  1. Giannetti, C., 2008. "Unit Roots and the Dynamics of Market Shares: An Analysis Using Italian Banking Micro-Panel," Discussion Paper 2008-44, Tilburg University, Center for Economic Research.
  2. Pekka Ilmakunnas, 2008. "Lower Bounds of Concentration in a Small Open Economy," Review of Industrial Organization, Springer, vol. 32(1), pages 19-33, February.

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