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Product Differentiation and Market Demand for TNC in an emerging economy: The Case of Indian Durable Consumer Goods Industries

  • Patibandla, Murali

    (Department of International Economics and Management, Copenhagen Business School)

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    One of the important strategic decisions of TNCs in entering emerging markets is product differentiation in relation to growth in incomes and type of competition expected from local firms. This paper develops a simple theory in the context of the Indian economy that has opened up recently to competition. Being protected from potential competition in the pre-reform era, local incumbents do not have the usual incumbency advantages. Saddled with sunk costs in sub-international product lines, they cannot price-compete if new entrant TNCs position their product qualities sufficiently high. This and the fact that income growth swells the income of the middle classes are used to generate two hypotheses: 1. New entrant TNCs enjoy higher income elasticity for their products. 2. They face price elasticity similar to locals' unless there are too many TNCs competing in the same generic market. The hypotheses are tested on the basis of firm level panel data for five consumer durable goods industries.

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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/6561
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    Paper provided by Copenhagen Business School, Department of International Economics and Management in its series Working Papers with number 6-2001.

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    Length: 17 pages
    Date of creation: 10 Jun 2001
    Date of revision:
    Handle: RePEc:hhb:cbsint:2001-006
    Contact details of provider: Postal: Department of International Economics and Management, Copenhagen Business School, Howitzvej 60, DK-2000 Frederiksberg, Denmark
    Phone: +45 3815 2515
    Fax: +45 3815 2500
    Web page: http://www.cbs.dk/departments/int/Email:


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    1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    2. Yadong Luo & Mike W Peng, 1999. "Learning to Compete in a Transition Economy: Experience, Environment, and Performance," Journal of International Business Studies, Palgrave Macmillan, vol. 30(2), pages 269-295, June.
    3. 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.
    4. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On the nature of competition with differentiated products," CORE Discussion Papers RP -685, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. 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.
    6. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
    7. Donnenfeld, Shabtai & Weber, Shlomo, 1992. "Vertical product differentiation with entry," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 449-472, September.
    8. Bhagwati, Jagdish, 1993. "India in Transition: Freeing the Economy," OUP Catalogue, Oxford University Press, number 9780198288473.
    9. John H Dunning, 1988. "The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions," Journal of International Business Studies, Palgrave Macmillan, vol. 19(1), pages 1-31, March.
    10. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    11. 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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