Butta, Antonio
(2007)
Optimal product-line decisions in dynamic markets.
PhD thesis, London School of Economics and Political Science.
Abstract
In differentiated markets, product-line decisions are a key dimension of the competitive process. In this thesis, I study firms' product-line choices in dynamic vertically-differentiated markets, capturing the process of "creative destruction" whereby technological progress allows firms to introduce products of better quality in the market that affect the profitability and ultimately the viability of relatively obsolete products of lower quality. The starting point of my analysis is the development of a static empirical structural model of endogenous quality choice, which I use to study the determinants of optimal product lines in the market for personal computers. I empirically estimate the structure of this model and I use it to study the relationship between consumers' willingness to pay for quality and the equilibrium range of qualities sold in the market. I then take a closer look at firms' product-line choices by developing an empirical structural dynamic model of optimal product-line decisions in the presence of sunk adjustment costs. This model allows me to capture the relative rigidity of product lines that I observe in the market for personal computers, to estimate firms' product-line adjustment costs and to study the impact that these costs have on firms' profitability. I also illustrate two theoretical studies that provide additional insights on firms' optimal product-line decisions in innovative markets. The first study investigates the intra-firm cannibalisation considerations that underlie the process of product replacement. I then analyse the product-line decisions taken by durable-good manufacturers and, in particular, I present a model to explain why durable good manufacturers in dynamic industries often play an active role as intermediaries in the exchange of second-hand, relatively obsolete, goods.
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