An econometric analysis of product variety impact on competitive market conduct in consumer goods markets

Abstract.

Decisions on product variety are a central part of the (strategic) marketing planning process of many consumer goods manufacturers. However, we have only limited information about the effects of product variety on competitive market conduct and profitability. In this paper, we introduce a simple econometric methodology for studying market conduct in prices and variety between rival brands of consumer goods markets. Our study follows the recent trend in empirical industrial organization, it is fully structural and starts from the specification of demand and supply functions. We introduce a number of different game theoretic regimes and characterize the equilibrium of each of these games. The equilibrium of each game is considered to be unique. On the basis of non-nested model selection, we can identify the form of competitive market conduct that is most suitable for the underlying data. Our empirical study identifies Nash behavior in pricing and collusive behavior in variety among the two leading brands in the market. The estimated parameters offer theoretically founded insight into the competitive rules in the market and the impact of prices and variety on profits.