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Product Differentiation, Industry Concentration and Market Share Turbulence

Building on the current theory of industrial concentration, we analyze the relation between market size and product differentiation, and show how product differentiation impacts market share turbulence. Our basic results highlight that in markets where vertical product differentiation dominates, firms will have an incentive to escalate investment in advertising and/or R&D as market size increases. Such (firm-specific) investments will make competitive advantage more sustainable as the firm is less imitable. This will not be the case if the market is primarily characterized by homogeneous product or horizontal product differentiation. Our predictions are tested using an original EU dataset for the period 1987-1997. Our results strongly support our predictions – the degree of market share turbulence increases with market size. However, this relation is weakened by competitive investment in advertising and R&D.

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File URL: http://www.ceris.cnr.it/ceris/workingpaper/2005/WP_14_05_RONDI_.pdf
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Paper provided by Institute for Economic Research on Firms and Growth - Moncalieri (TO) in its series CERIS Working Paper with number 200514.

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Length: 26 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:csc:cerisp:200514
Contact details of provider: Postal: Via Real Collegio, 30 10024 - Moncalieri TO
Phone: +39-11.6824.911
Fax: +39-11.6824.966
Web page: http://www.ceris.cnr.it/
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  1. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago.
  2. Ashish Arora & Alfonso Gambardella, 1996. "Domestic Markets and International Competitiveness," Industrial Organization 9605001, EconWPA.
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  4. Schmalensee, Richard, 1992. "Sunk Costs and Market Structure: A Review Article," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 125-34, June.
  5. Ingemar Dierickx & Karel Cool, 1989. "Asset Stock Accumulation and Sustainability of Competitive Advantage," Management Science, INFORMS, vol. 35(12), pages 1504-1511, December.
  6. Khalid Sekkat & Adriaan Dierx & Fabienne Ilzkovitz, 2004. "European integration and the functioning of product markets," ULB Institutional Repository 2013/7310, ULB -- Universite Libre de Bruxelles.
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  8. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-46, December.
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  10. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
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  12. Davies, Stephen & Rondi, Laura & Sembenelli, Alessandro, 2001. "European Integration and the Changing Structure of EU Manufacturing, 1987-1993," Industrial and Corporate Change, Oxford University Press, vol. 10(1), pages 37-75, March.
  13. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
  14. Lyons, Bruce & Matraves, Catherine & Moffatt, Peter, 2001. "Industrial Concentration and Market Integration in the European Union," Economica, London School of Economics and Political Science, vol. 68(269), pages 1-26, February.
  15. Matraves, Catherine, 1999. "Market Structure, R&D and Advertising in the Pharmaceutical Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(2), pages 169-94, June.
  16. Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August.
  17. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  18. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  19. Marcus Asplund & Volker Nocke, 2003. "Firm Turnover in Imperfectly Competitive Markets," PIER Working Paper Archive 03-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  20. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
  21. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
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  23. Ingemar Dierickx & Karel Cool, 1989. "Asset Stock Accumulation and the Sustainability of Competitive Advantage: Reply," Management Science, INFORMS, vol. 35(12), pages 1514-1514, December.
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