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Product Differentiation, Industry Concentration and Market Share Turbulence

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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. Our basic results highlight 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. 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 product or horizontal product differentiation. Our predictions are tested using an original EU dataset for the period 1987-1997. 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.ceris.cnr.it/ceris/workingpaper/2005/WP_14_05_RONDI_.pdf
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Bibliographic Info

Paper provided by Institute for Economic Research on Firms and Growth - Moncalieri (TO) in its series CERIS Working Paper with number 200514.

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Length: 26 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:csc:cerisp:200514

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Keywords: product differentiation; market size; turbulence;

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Cited by:
  1. Ilmakunnas, Pekka, 2006. "Lower bounds of concentration in a small open economy," MPRA Paper 1859, University Library of Munich, Germany.
  2. 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.

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