Product differentiation and systematic risk: theory and empirical evidence

Santiago Bazdresch ()

MPRA Paper from University Library of Munich, Germany

Abstract: Firms producing differentiated products have high margins and therefore low risk. As a result firms invest more into developing differentiated products when they perceive risk is high. Higher risk also implies higher product skewness towards more differentiated products and therefore higher average markups. The model predicts endogenous systematic and idiosyncratic riskiness as well as endogenous intensity of competition: firms in high risk industries reduce their riskiness by competing less than firms in low risk industries. Empirical evidence on product differentiation, R\&D expenses, B/M ratios, and market $\beta$ is consistent with the model.

Keywords: Stock Returns; Price Differentiation; Product Market Competition; Product Development; Idiosyncratic Volatility; Research and Development; Counter-Cyclical Markups; Price of Risk; Price-Cost Margin; Investment; Innovation (search for similar items in EconPapers)
JEL-codes: E22 E32 G12 G32 L11 L16 L25 O31 (search for similar items in EconPapers)
Date: 2011-10-01, Revised 2011-11-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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