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Separating Vertical from Horizontal Differentiation


  • Ricardo D. Brito


  • Eduardo Correia de Souza


  • Rodrigo Moita



We demonstrate that R&D intensity is an appropriate measure of vertical differentiation, while the Rauch (J Int Econ 48:7–35, 1999) classification mainly captures horizontal differentiation. Product market characteristics vary considerably across R&D intensity-based “technology levels” of the OECD-STI taxonomy, as well as across categories of the Rauch classification. Both high technology and differentiated products display lower price elasticity of demand and longer quality ladders than do low technology and homogeneous products. However, variety proliferation decreases with the technology level and increases with the Rauch category, while price dispersion increases with technology but not with the Rauch. Additionally, Rauch categories do not differ in factor intensities, while higher tech industries are more capital intensive than lower tech ones.

Suggested Citation

  • Ricardo D. Brito & Eduardo Correia de Souza & Rodrigo Moita, 2024. "Separating Vertical from Horizontal Differentiation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(2), pages 183-218, March.
  • Handle: RePEc:kap:revind:v:64:y:2024:i:2:d:10.1007_s11151-023-09924-y
    DOI: 10.1007/s11151-023-09924-y

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    R&D intensity; Product differentiation; Product market characteristics;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade


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