Ceris-Cnr, W.P. N° 14/2005 

Product Differentiation, Industry Concentration and Market Share Turbulence


Catherine Matraves* and Laura Rondi**
 

Abstract: 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.

 

Keywords: product differentiation, market size, turbulence
JEL Codes: L11; L13

 

SCARICA QUESTO WP

 

We are grateful to Stephen W. Davies for his helpful comments and suggestions. We also acknowledge comments from participants at the International Industrial Organization Conference in Atlanta (April 2005) and at the European Association for Research in Industrial Economics conference in Porto (September, 2005). We also thank Silvana Zelli for her assistance on the dataset. All remaining errors are ours.

 

*    Department of Economics, Michigan State University, East Lansing, Michigan 48824.
Email: matraves@msu.edu;

**  Politecnico di Torino and CERIS-CNR,  Via Real Collegio 30, 10024 Moncalieri (To), Italy. 
Email: laura.rondi@polito.it.