Product Differentiation and Systematic Risk: Theory and Empirical Evidence

Santiago Bazdresch

University of Minnesota - Finance Department

November 13, 2011

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.

Number of Pages in PDF File: 21

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

JEL Classification: E32, E22, G12, G32, L11, L16, L25, O31

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Date posted: December 14, 2011  

Suggested Citation

Bazdresch, Santiago, Product Differentiation and Systematic Risk: Theory and Empirical Evidence (November 13, 2011). Available at SSRN: http://ssrn.com/abstract=1971891 or http://dx.doi.org/10.2139/ssrn.1971891

Contact Information

Santiago Bazdresch (Contact Author)
University of Minnesota - Finance Department ( email )
321 19th Avenue South
Room 3-122
Minneapolis, MN 55455
United States
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