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Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry

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  • Xosé-Luís Varela-Irimia

    ()
    (Universitat Rovira i Virgili)

Abstract

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

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File URL: http://www.pcb.ub.edu/xreap/aplicacio/fitxers/XREAP2012-16.pdf
File Function: First version, 2012
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File URL: http://www.pcb.ub.edu/xreap/aplicacio/fitxers/XREAP2012-16.pdf
File Function: Revised version, 2012
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Bibliographic Info

Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2012-16.

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Length: 41 pages
Date of creation: Sep 2012
Date of revision: Sep 2012
Handle: RePEc:xrp:wpaper:xreap2012-16

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Web page: http://www.pcb.ub.edu/xreap
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Keywords: Product introduction; entry; uncertainty; multiproduct firms; automobile.;

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  1. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
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  13. Ghosal, Vivek, 1996. "Does uncertainty influence the number of firms in an industry?," Economics Letters, Elsevier, vol. 50(2), pages 229-236, February.
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  17. Folta, Timothy B. & Johnson, Douglas R. & O'Brien, Jonathan, 2006. "Uncertainty, irreversibility, and the likelihood of entry: An empirical assessment of the option to defer," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 432-452, November.
  18. María Moral & Jordi Jaumandreu, 2007. "Automobile demand, model cycle and age effects," Spanish Economic Review, Springer, vol. 9(3), pages 193-218, September.
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Cited by:
  1. Anna Castañer & Mª Mercè Claramunt, 2014. "Optimal stop-loss reinsurance: a dependence analysis," Working Papers XREAP2014-04, Xarxa de Referència en Economia Aplicada (XREAP), revised Apr 2014.
  2. Antonio Manresa & Ferran Sancho, 2012. "Leontief versus Ghosh: two faces of the same coin," Working Papers XREAP2012-18, Xarxa de Referència en Economia Aplicada (XREAP), revised Oct 2012.

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