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http://ssrn.com/abstract=559244
 
 

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Product Variety and Demand Uncertainty


Dennis W. Carlton


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

James D. Dana Jr.


Northeastern University - Department of Economics; Northeastern University - Department of International Business and Strategy; Harvard Business School

June 2004

NBER Working Paper No. w10594

Abstract:     
We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. We derive these results in both a monopoly model and a variety of different competitive models. We conclude with a discussion of empirical predictions together with a brief discussion of supporting evidence available from marketing studies.

Number of Pages in PDF File: 40

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Date posted: July 8, 2004  

Suggested Citation

Carlton , Dennis W. and Dana, James D., Product Variety and Demand Uncertainty (June 2004). NBER Working Paper No. w10594. Available at SSRN: http://ssrn.com/abstract=559244

Contact Information

Dennis W. Carlton (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-322-0215 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
James D. Dana Jr.
Northeastern University - Department of Economics ( email )
301 Lake Hall
Boston, MA 02115
United States
617-373-7517 (Phone)
HOME PAGE: http://www.economics.neu.edu/dana/
Northeastern University - Department of International Business and Strategy
360 Huntington Ave
Boston, MA 02115
United States
Harvard Business School ( email )
Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-495-6958 (Phone)
HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=438792
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