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We demonstrate that demand uncertainty can explain equilibrium product variety in the presence of sunk costs. Product variety is an efficient response to uncertainty because it reduces the expected costs associated with excess capacity. We find that within the firm's product line, the highest quality product has the highest profit margin but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. Both of these relationships are consistent with evidence available from marketing studies. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.

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  • Dennis W. Carlton & James D. Dana, 2008. "PRODUCT VARIETY AND DEMAND UNCERTAINTY: WHY MARKUPS VARY WITH QUALITY -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 535-552, September.
  • Handle: RePEc:bla:jindec:v:56:y:2008:i:3:p:535-552

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    References listed on IDEAS

    1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    2. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    3. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
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    Cited by:

    1. Tamini, Lota Dabio, 2012. "Optimal quality choice under uncertainty on market development," Working Papers 148589, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
    2. Cheng, Yi-Ling, 2014. "Vertical product differentiation under demand uncertainty," Economic Modelling, Elsevier, vol. 36(C), pages 51-57.
    3. In Kyung Kim, 2017. "How Much Product Variety is Required? Evidence from the Movie Theater Market," Working Papers 1704, Nazarbayev University, Department of Economics, revised Jun 2017.

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