Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry

Xose-Luis Varela-Irimia

Working Papers from Universitat Rovira i Virgili, Department of Economics

Abstract: This article studies how product introduction decisions relate to profitability and uncertainty in the context of multi-product firms and product differentiation. These two features, common to many modern industries, have not received much attention in the literature as compared to the classical problem of firm entry, even if the determinants of firm and product entry are quite different. The theoretical predictions about the sign of the impact of uncertainty on product entry are not conclusive. Therefore, an econometric model relating firms’ product introduction decisions with profitability and profit uncertainty is proposed. Firm’s estimated profits are obtained from a structural model of product demand and supply, and uncertainty is proxied by profits’ variance. The empirical analysis is carried out using data on the Spanish car industry for the period 1990-2000. The results show a positive relationship between product introduction and profitability, and a negative one with respect to profit variability. Interestingly, the degree of uncertainty appears to be a driving force of entry stronger than profitability, suggesting that the product proliferation process in the Spanish car market may have been mainly a consequence of lower uncertainty rather than the result of having a more profitable market. Keywords: Product introduction, entry, uncertainty, multiproduct firms, automobile JEL codes: L11, L13

Keywords: Diferenciació de productes; Automòbils Indústria i comerç; 334 - Formes d'organització i cooperació en l'economia (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-bec and nep-com
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Working Paper: Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry (2012)
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