Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry
AbstractThis 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
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Bibliographic InfoPaper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2012-16.
Length: 41 pages
Date of creation: Sep 2012
Date of revision: Sep 2012
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Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques i Empresarials, Universitat de Barcelona, c/ Tinent Coronel Valenzuela, 1-11, 08034 Barcelona
Web page: http://www.pcb.ub.edu/xreap
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Product introduction; entry; uncertainty; multiproduct firms; automobile.;
Other versions of this item:
- Varela-Irimia, Xosé-Luís, 2012. "Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry," Working Papers 2072/181403, Universitat Rovira i Virgili, Department of Economics.
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-22 (All new papers)
- NEP-BEC-2012-09-22 (Business Economics)
- NEP-COM-2012-09-22 (Industrial Competition)
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