The Economics of Product Variety: A Survey

Abstract

Demand for variety may arise from a taste for diversity in individual consumption and/or from diversity in tastes when each consumer chooses a single variant. The full degree of variety potentially demanded will not, in general, be supplied because scale economies (even to a small degree) mean that the potential welfare or revenue gain from greater variety must be balanced against the lower unit production costs with fewer variants. The economics of product variety consists essentially in analysing the effect of this balance in different situations, and comparing the degree of product variety for different market structures with each other and with the optimum. The survey commences with the work on market structures with single product firms (generalized monopolistic competition), tracing modern developments in both the Chamberlinian and Hotelling traditions. The latter has been particularly fruitful, due to the expansion of the original locational ideas into virtual spaces in product characteristics. The emphasis in recent work on product variety has been on multiproduct firms in both monopolistic and oligopolistic structures, including strategic market preemption. Although most work has been in a full information context, there have been advances in product variety under imperfect information (either by consumers to properties of the firms' products or firms as to consumers' demands).product differentiation, product variety, monopolistic competition, oligopoly

Product Development Decisions: A Review of the Literature

“…We discuss only a small subset of the references, but we hope that Tables 2 and 3 stand alone as a guide to the articles that are likely to be most useful to the reader. (Clark 1985) (Sanchez and Mahoney 1996) (von Hippel 1990) (Henderson and Clark 1990) (Simon 1969) (Whitney 1993) (Huang and Kusiak 1998) What variants of the product (De Groote 1994) (Ishii et al 1995) (Lancaster 1990) will be offered? (Ho and Tang 1998) (Kekre and Srinivasan 1990) (Martin and Ishii 1996) Which components will be (Fisher et al 1998 Who will produce the (Dyer 1996) (Liker et al 1996a) (Mahoney 1992) components and assemble (Dyer 1997) (Liker et al 1996b) (Monteverde and Teece the product?…”

“…Lancaster (1990) provides a comprehensive discussion of the basic economics of product variety. Ho and Tang (1998) is a collection of research articles addressing issues in the management of product variety.…”

Product Line Selection and Pricing with Modularity in Design

“…We focus on identifying strategic insights into the impacts of degree of modularity and production cost on product line length, price markup, and market share. The economics literature has studied the effect of product variety from a market perspective by simply assuming a linear product development cost function (see Lancaster 1990 for a review). In contrast, the operations management literature generally views modular design as a cost-saving tool (see, e.g., Ulrich and Eppinger 2004).…”

Managing Product Variety and Collocation in a Competitive Environment: An Empirical Investigation of Consumer Electronics Retailing

“…This first key finding generally parallels existing studies. For example, Lancaster (1990) shows theoretically that a monopoly, facing no competition, should produce the least product variety of any market structures. In a study of the video rental market in a district of Edmonton, Alberta, de Palma et al (1994) find that centrally located stores, which face the most competition, tend to offer more product variety than do stores on the market boundaries.…”

“…This lever appears increasingly appealing in the retail industry, where more and more retailers have adopted "price match guarantees" (e.g., Best Buy, Sears, Staples, Vons, and sometimes Wal-Mart) and cannot resort to temporary price reductions as effectively as they might have in the past to attract consumers. Considerable research has studied why variety might theoretically benefit the firm (e.g., Kahn 1998a, b;Lancaster 1990Lancaster , 1998 and examined empirically the benefits (e.g., Kekre & Srinivasan 1990) and costs of expanding variety (e.g. Randall & Ulrich 2001).…”