The pursuit of variety: creation of new products and strategic differentiation

The generation of new varieties is crucial for economic growth. The capitalistic mode of production has shown over time a remarkable capability of setting incentives for economic actors to create new products and processes. Concerning the development of new products, the incentives lie in the possibility to gain market power either by offering goods and services that are not provided by competitors, or by increasing the range of products´ palette via small modifications and by exploiting the resulting market segmentation in a strategic way. In terms of the impact on the economic growth, these two strategies are not equivalent, because the latter results in welfare transfers among firms or between consumers and producers, while the former generates something truly new and therefore generates welfare. In this paper we claim that firms cannot pursue both strategies at the same time. In particular, we investigate whether the generation of truly new products, which represents the real engine of growth, can be hindered by strategies that simply seek the introduction of minor variations in existing products to exploit pricing advantages. Our empirical analysis relies upon an original dataset including all the skis produced by 42 manufacturers and sold in the European market between 1992 and 2007. For 4193 models, we have collected data on the key product characteristics and we investigate the relationship between the distance of the product from its competitors and a series of variables accounting for firm-specific differentiation strategies at the level of technical and service characteristics over time. In the next paragraph, we clarify and discuss the two concepts of variety above mentioned and we formulate our working hypotheses. In the third section, we describe the dataset and test empirically the hypotheses. Results and conclusions follow.