Product Variety and Demand Uncertainty / Dennis W. Carlton, James D. Dana.

Format:

Book

Author/Creator:

Carlton, Dennis W.

Contributor:

National Bureau of Economic Research.

Dana, James D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10594.

NBER working paper series no. w10594

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. We derive these results in both a monopoly model and a variety of different competitive models. We conclude with a discussion of empirical predictions together with a brief discussion of supporting evidence available from marketing studies.

Notes:

Print version record

June 2004.